In this blog, we will help you understand what a decentralized exchange is? What is a decentralized platform? How to do a digital exchange? And much more about blockchain technology. Let us start with the basics.

What is Decentralized exchange or DEX?

A decentralized exchange (DEX) is an online exchange market that eliminates or minimizes third-party services' role to hold the customer's funds. Through DEX, the trade takes place directly between users, via an automated process. Hence, it establishes a peer-to-peer (P2P) connection.

This type of system can be established by creating proxy tokens or assets (like shares in a company) or using a decentralized multi-signature custodianship system, among other solutions.
Proxy tokens- these are crypto assets that are assigned to represent a certain fiat or cryptocurrency.

This system is unlike the centralized model of operation. A centralized model is a model of operation through which users deposit their funds, once they do so, the exchange provides them an 'IOU' that can be used in the further to trade freely on the platform. If the user decides to withdraw their funds, they are converted back into the cryptocurrency they represent and send back to their owner.

What are DEX platforms?

A Digital Currency Exchange(DCE) is a being or business that plays the role of online market maker and is responsible for exchanging legal tenders and cryptocurrencies for other cryptocurrencies contrariwise, for a pre-decided commission.

Cryptocurrencies, however, are self-governed currencies. Unlike fiat money, they have a centralized governing body and are legally sanctioned by the government of a country.

A large chunk of these digital currency exchanges (DCE) are privately held enterprises, this makes the access to private financial information, and the company management records troublesome. Hence they are hard to trace and operate freely.

How to do a digital exchange?

To put it simply, a cryptocurrency exchange allows the user to exchange their existing cryptocurrency for another. This exchange of cryptocurrencies can be used to turn cryptocurrencies into fiat currency or vice versa. It can also be used for buying and selling the same.

A cryptocurrency exchange usually sets the rate of each possible currency. All factors like, the coins and the tokens and the rate generally depend on the activity of the buyers or sellers and a variety of other factors that can impact the price of these digital currencies.

Every cryptocurrency exchange has different options. Some are specially tailored for the use of traders, whereas others are made for instant crypto-fiat exchange. Along with these, some exchanges are made for regular traders where one can buy crypto assets and sell them at a lower price than on a usual crypto-fiat exchange.
Usually, these trading platforms charge an additional fee; these fees usually depend on the money that the user is withdrawing from their account.

In short, any cryptocurrency exchange platform works in a very similar way that a regular stock exchange would. The difference, however, is that in a stock exchange setting, a trader will buy and sell assets. However, on a crypto exchange platform, a trader will make use of the crypto pairs he possesses to profit from their volatile value rates.

Decentralized v/s Centralized exchange?

A centralized crypto exchange (CCE) is a trading platform whose functions are similar to that of a traditional brokerage or a stock market. A Centralized Crypto Exchange is generally owned and run by a company that tends to maintain total control over all transactions taking place under its name.

Users of Centralized Exchanges tend not to have access to the private keys, (which is responsible for safeguarding your account) of their own exchange account’s wallets. This means putting all of the user’s trust in the hands of the operators responsible for the exchange. This is because transactions can only be made through the procedures followed and approved by a central authority.

While a decentralized crypto exchange is more like cryptocurrencies, no immediate companies operate DEX, distributing control over various servers and peer-to-peer exchanges as they are making use of blockchain technology. By this, a decentralized exchange does not purposely hold customers’ funds or information, and only serves the consumer as a matching and routing layer for trade orders made by them.

Reasons to use Decentralized platforms for trading

Security

Centralized exchanges tend to hold huge amounts of funds from investors. This makes them a prime target for hackers. Since the control is centralized, it is easier to get a hold of it, all at once. If the hacker can access the server that everything is stored in, he will be able to manipulate it until he’s caught easily.

With the increasing use of cryptocurrencies, centralized exchanges are becoming a target for hackers. At the same time, decentralized exchanges are becoming more user-friendly, common, and easy to use. All of this, while providing better security for investors.

Privacy

Centralized exchanges are assigned as money service providers (MSPs) in various jurisdictions; this means that the users are required to undergo mandatory, time-consuming processes.
Due to this people are reluctant to provide their private information to third party entities because it means they have no control over what happens with their data.

Decentralized exchanges, however, aren’t under central control. Hence, there are often no requirements for using the exchange other than having a wallet address.

Control over funds

Hacking is not the only concerning issue with centralized exchanges. In CCEs, users do not have complete control over their funds. Instead, it’s in the hands of centralized exchanges.
Once again, due to the nature of DEXs, the funds are under your control, and no central authorities can control them. If the exchange goes down tomorrow, or the server is down, your funds will be unaffected.

Financial inclusiveness

With increasing regulatory pressure, various centralized exchanges have restricted access, in particular countries.
Decentralized exchanges allow individuals anywhere in the world to trade cryptocurrencies freely, as a centralized authority doesn’t govern them. Investors can freely invest as little as they want, and the P2P transaction costs are much lower than on traditional exchanges.

Less Risk

Decentralization gave rise to digital currencies due to its ability to gain user confidence.

Cryptocurrencies' are rising in value; this reflects people's skepticism of central authorities. And their underlying reason is, decentralization, is too-big-to-fail. It has too many servers connected to pinpoint a single one and bring it down.

In technology, a single point of failure can halt a network. Here, if one node goes offline, it transfers the workload to other nodes. This means everything can remain up and running.

Trustworthy

A decentralized platform can provide a transparent database that ensures the trust of the users due to blockchain technology security.

Due to the sharing of control in a DEX, it allows all users to have equal access to the data, and hence it asks all users before making any change. This increase in trust can help in the making of secure ecosystems that can be used for storing and sharing data.

Difficult to tamper

Through decentralization, we can significantly reduce this risk.
In a true P2P decentralized model, there is no need for a middleman. This gives the users more confidence. To tamper with the platform, the attacker would need to compromise all the nodes attached to the systems. Which is practically impossible in the case of DEXs.

Eliminates the role of middlemen

The users and the marketers both like to eliminate the role of intermediaries and get it replaced with better alternatives.
The DEXs provide us a chance to cut out those money-seeking middlemen, by providing us with a system that connects the buyer with the seller directly and establishes a P2P connection.

Not owned by one entity

Any central entity doesn’t control dEXs. And hence there’s no single point that can lead to failure. This lack of centralization allows for censorship resistance.

This safeguards the users not only from central governments but also from centralized marketplaces.

Global reach

Decentralized exchanges are instantly global. This is an advantage for anyone willing to buy or sell cryptocurrencies, as it will let them operate on a global level.

This is not possible in the case of centralized exchanges. They have to go through various laws and regulations for everything.

Signing off - DEXs are the future of trading and investments!

Decentralized exchanges are easy to operate and give unmatchable advantages to the users. We hope we were able to throw some light on what decentralized exchanges are and why you should use them for trading.