What market problems have decentralized exchanges (DEX) solved?
The blockchain started with Bitcoin’s White Paper. The manifesto of the first cryptocurrency was supposed to replace intermediaries with cryptography and solve the issue of double spending in an environment without trust — the Internet, offering a new form of relationship with money, which is imbued with the spirit of freedom, anonymity and authenticity.
It turns out that the blockchain will be needed in all the cases where reliability, optimization, control and automation of working with information in the digital space are needed.
Cryptocurrency is the starting point for the blockchain technology development but the crypto industry today is primarily about digital financial assets. Every year they attract the attention of not only ordinary users but also institutional investors, developers, businessmen, large companies and the public sector.
The capitalization of the cryptocurrency market is measured in trillions of dollars, and whether we want it or not, exchanges are an integral part of the market that allows the user to transfer fiat money into digital financial assets.
Cryptocurrency exchanges: an essential tool for working with tokens
An exchange is a service where buyers and sellers meet to exchange one CFA for another. The exchange acts as an intermediary in the exchange of assets and charges a fee.
Of course, this contradicts the idea of Satoshi Nakomoto, since the world has long known how intermediaries can not only terribly fulfill their obligations, but also disappear with users’ money, or restrict users in transfers.
Exchanges are not exceptions and there are a huge number of cases of freezing or theft of funds from users of exchanges. Before the advent of smart contract technology and the DeFi market, it was possible to become part of the cryptocurrency market only through centralized exchanges, exchangers or someone else’s hands.
Smart contracts and Defi services have revealed such a miracle as DEX in the blockchain environment. And today we have 2 types of exchanges: centralized (CEX) and decentralized (DEX).
Let’s remember how CEX works
CEX is a centralized service (website), the maintenance and operation of which is carried out by one organization, which is an intermediary in the conclusion of transactions. Such exchanges have equipment and software that allows you to accept funds to the wallets of the exchange and withdraw funds from the wallets of the exchanges.
As a rule, there are restrictions on trading or withdrawal of funds on such exchanges, which can be removed by the KYC procedure, which is designed to combat money laundering.
In principle, a centralized exchange is not much different from banks. When a user registers on the exchange, he sees wallets of various cryptocurrencies that he can replenish. These wallets belong to the exchange, which automatically draws numbers in the user’s personal account in the equivalent of those funds that were brought to the exchange.
All exchange operations on such an exchange are just a change in user balances and they are not reflected in the blockchain in any way. The user simply changes the numbers in one cryptocurrency to the numbers in another cryptocurrency.
When a user wants to withdraw funds, he makes a request and the platform already withdraws cryptocurrency to him automatically from the wallets of the exchange after confirming the withdrawal.
However, unlike banks, the risk that the exchange disappears with users’ money at one moment is slightly higher. There are a lot of examples of exchange scams and even more cases of freezing of users’ digital financial assets by centralized platforms.
DEX solves the issue of centralization.
DEX is a smart contract that connects users’ wallets directly via a visual interface. Since there is actually no website with wallets on DEX (unlike CEX), and the exchange takes place by transaction from address to address, then DEX does not require any registration and verification.
To use the DEX exchange, you need to connect a Metamask wallet or any other DeFi wallet to the exchange and make an exchange through a visual interface.
The exchange fees will be written off according to the current fee on the network, no one can freeze your funds since they lie on your wallet, from which you have a seed phrase, which means no one but you can manage your balance. Instead of stock cups of centralized exchanges, liquidity pools are implemented on the DEX exchange. The way it works will be discussed in other articles.
Thus, we get the realization of the very idea of Satoshi Nakamoto, but already in the world of cryptocurrencies. Anonymous crypto transactions signed by the user himself without intermediaries and secure storage of crypto assets — this is DeFi as a whole.
However, there is fraud on DEX exchanges as well: attackers fake transactions or create fraudulent ones, send tokens and in order to exchange them, the victim connects his wallet, calls a smart contract and loses all funds.
To protect yourself from scammers, use only proven and reliable platforms such as Decimalchain.
Decimal will soon finish its work on the Decimal Smart Chain. With the help of it, we will immediately receive two of the most popular products on the market — a decentralized exchange and a decentralized crowdfunding platform. This will greatly strengthen the position and practical value of Decimalchain, expand the existing ecosystem and provide even more liquidity to the basic blockchain token DEL.
What was done by the DEX technology:
- Freed the market from intermediaries.
Of course, not the entire market has gone to decentralized platforms. It takes time. Perhaps an unusual interface, high fees in some networks and the illiteracy of many market participants slow down this transition. That is why such advanced blockchains as Decimalchain are in high demand by the market today: the network fee is very low, excellent throughput allows you to make thousands of transactions per second, and a simple and intuitive interface makes this tool available even to users without any special skills to work with the blockchain environment.
2. Made it possible to secure exchanges directly on the blockchain.
However, on some blockchains, the exchange fees are too high. For example, fees on the Ethereum blockchain on the Uniswap exchange sometimes exceeded $60–100. Naturally, the alternatives were not long in coming and such exchanges as Pancake swap appeared, where the fee is $0.5 on average. And on Decimalchain DEX (dels.io), the fee will be about $0.04.
3. Opened the possibility of storing funds on a wallet linked to the exchange.
This saves users from having to make transactions from their wallet to the exchange’s wallet if there is a need to sell coins.
4. Made the coin listing available and free.
It is enough for the coin creator to create a liquidity pool, or in other words, to provide their tokens with a native token of the DEX network. For example, on dels.io, the security of any token will be based on the DEL coin. Now there is no need to pay for listings to an intermediary since the security of transactions is provided not by an intermediary in the form of a centralized exchange staff, but by a decentralized exchange smart contract.
Author: Konstantin Medvedev, specially for Decimalchain