What Is DEX?



What is a decentralized exchange?

Decentralized exchange (DEX) is an exchange built on a distributed ledger. It does not store users’ private data on its servers and only serves as a platform for matching users’ bids and asks. All trade that happens on such a platform is strictly peer-to-peer with no financial intermediaries.

That being said, most exchanges that would call themselves decentralized do not exactly fit the bill. They do use their servers to store data on trades and bids even though private keys are stored user-side.


What is the difference between decentralized and centralized exchanges?

Centralized exchanges are for-profit entities run by an individual or a company. Such exchanges have dedicated staff to safeguard users’ personal data security, oversee and maintain the routine processes and make decisions on exchange’s further development.

Decentralized exchanges are run automatically or semi-automatically when users are involved in the decision-making process. Such platforms facilitate direct interaction between users and employ blockchain to store and process all data.


Are there any decentralized exchanges on the market right now?

More than two hundred full-fledged decentralized exchanges are operating on the market today. Still, that is a paltry number in comparison to their centralized counterparts which exceed a few thousand.


What are the main benefits of decentralized exchanges?

DEX’s benefits mostly result from its distributed nature and the absence of a single point of failure. A few such key benefits are:

  • DEX guarantees users anonymity.
  • DEX does not store user’s assets hence hacker attack or software failure will never lead to users losing money, which regularly happens to centralized exchanges, including the large ones like ShapeShift or Bitfinex.
  • DEX has no single entry point which would allow hackers to access all data. Such architecture makes the very act of hacking it worthless.
  • DEX has no cumbersome verification procedures, it does not even require an email, making it impossible to breach users’ privacy.
  • DEX has no owners able to manipulate asset prices behind the curtains.
  • DEX has a distributed architecture making it impossible for governments to shut it down or freeze your account.

Summing up, decentralized platforms allow users to retain full control over their assets and bids, which comes with full responsibility for their actions and mistakes.


What are the main shortcomings of decentralized exchanges?

Distributed nature and full user control also present a number of issues:

  • Many trading tools (stop loss, marginal trade, lending) are simply unavailable.
  • DEX usually has a much smaller liquidity pool.
  • DEX has no user support, neither can it restore accounts or revert transactions.
  • DEX is run by smart contracts, so cryptocurrencies that do not support smart contracts can not be traded here.

As illustrated by the aforementioned complication, decentralized exchanges are actually safer than centralized ones but only for an experienced user able to take full responsibility for their actions. There is no tech support to correct a mistake. Moreover, some decentralized exchanges (like Bancor) were proven to have actual vulnerabilities that allowed for theft in the past.


How are decentralized exchanges regulated?

Regulators in the U.S. are trying to use the existing legislation, while in Singapore they are working on a new legal base to regulate such exchanges. Still, there is no unambiguous position pertaining to decentralized exchanges in these countries, while other countries do not regulate decentralized exchanges at all.

Among the main issues linked to decentralized exchanges is the absence of a liable individual or a company in charge of the platform. This causes various problems pertaining to the apprehension of people responsible for any sort of illegal activities that happen on the platform.


What does the future hold for decentralized exchanges?

Many believe that centralized exchanges will be gradually implementing various features of decentralized ones and thus the future lies somewhere in the middle. But in general decentralized exchanges are considered the best solution to facilitate trade between unlimited numbers of cryptocurrency users.

That being said, blockchain scalability and mass adoption are still among major issues of the industry to be solved in the future. Also to entice users en masse decentralized exchanges need to improve UI usability.

While the aforementioned issues are not solved, decentralized exchanges remain a niche product.

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