Decentralized exchange is basically the exchange of an inherently decentralized asset. It enables traders to trade with cryptocurrencies without the involvement of third parties. Although the concept of cryptocurrency exchange is relatively new, day by day it is becoming more popular. Thousands of traders have started their cryptocurrency business because of its bright future and potentiality to make a decent profit. However, as many investors are now investing in these currencies, it has become necessary to decode the cryptos, and decentralized exchange is one of such platforms where you can decode the crypto. You can consult our decentralized exchange development service for having peer-to-peer cryptocurrency trading.
What Is Decentralized Exchange?
We expect that now you have a basic idea about this decentralized exchange.
Decentralized exchange or DEX is a peer-to-peer (P2P) platform or marketplace, where two cryptocurrency traders directly trade with each other and make transactions without the involvement of a broker or third party. These transactions are finalized and made through the traders’ self-executing agreements, which are written in smart contracts.
What are smart contracts?
These contracts are the automated agreements that are made between a contract creator and a recipient. In the blockchain market, these agreements are baked because the traders make the contract as written code. Hence, the agreements become irreversible and immutable. These contracts also automate a workflow and notify when conditions are satisfied.
DEXs were built to eliminate the need for the authority to authorize and oversee any trades that are carried out within a particular exchange. These platforms allow the P2P trading of a cryptocurrency. The entire system is considered non-custodial, and it indicates that the users will have the custody of keeping their funds.
What Are the Differences between Centralized Exchanges (CEXs) and Decentralized Exchanges (DEXs)?
To understand the functions of decentralized exchanges, you have to know the differences between centralized and decentralized exchanges.
- Centralized exchanges are handled by a central organization, like a bank, which is involved in the transaction processes and financial services to earn profits. On the other hand, decentralized exchanges depend only on smart contracts and allow the traders to carry out orders without the involvement of a third party.
- Centralized exchange platforms account for the trading volume in this cryptocurrency marketplace. Some platforms provide firm insurance on the users’ deposited assets. In decentralized exchange platforms, the users will have the power to guard their funds, and only they will be responsible for making any mistakes.
Types of Decentralized Exchanges?
Decentralized exchange platforms are built based on the blockchain networks, which support the smart contracts and where users can keep custody of the funds, and the trade sustains a trading fee along with the transaction fee.
There are mainly three types of these platforms, and they are –
- Automated market makers (AMMs): This smart contracts-dependent system was built to solve liquidity issues. The exchanges come from the inspiration that originates from the paper written on DEXs by Vitalik Buterin, the co-founder of Ethereum.
The AMMs depend on blockchain-based services, which provide sufficient information to set the budget of assets. Instead of matching the sell and buy orders, the smart contracts in DEXs use liquidity pools, which are also known as pre-funded pools of the trading objects.
- Order books decentralized exchanges: Order books organize records of all the open orders to sell and buy an asset for another asset. Buy orders indicate that a trader wants to buy an asset for a particular price whereas sell orders signify that a trader is prepared to sell his asset for a specific price. The spread between the buy and sell prices determines the market price.
There are on-chain and off-chain order books of DEXs. On-chain order books allow the users to leverage their trading positions by using the borrowed funds from lenders. Off-chain order books, in contrast, help the platform to reduce the costs and enhance the speed to make sure that every trade is executed at a price desired by the traders.
- Decentralized exchange aggregators: This type of DEX uses many different mechanisms and protocols to provide solutions related to liquidity. These DEXs aggregate the liquidity from many other DEX platforms to reduce slippage on the larger orders and optimize the swap fees along with token prices. At the same time, it also offers the users an excellent price within a short time.
Protecting the traders from the market pricing effect and reducing the chance of failed transactions are the most important two goals of aggregators. There are some DEXs aggregators that use liquidity from the centralized exchange platforms so that those can provide the traders with a great experience.
Benefits of Using Decentralized Exchanges
Trading on DEXs seems can be expensive when the network transaction charges are high, and traders execute trades during this period. However, one may get several benefits of using decentralized exchange platforms for trading.
- Token availability
When it is about the centralized exchange platform, it vets tokens individually and makes sure that the tokens adhere to the local rules and regulations. However, DEXs include the tokens stamped on the blockchain market, where they were created. It means that new trades will be listed on these platforms before they are available on the centralized platforms.
When a trader exchanges one currency in the platform for another one, his anonymity is strictly maintained in the decentralized exchange platform. In a centralized exchange platform, traders do not have to go through the identification process, which is also called Know Your Customer. Due to this process in DEXs, a huge number of users feel interested because they do not want to get identified.
- Minimal security and counterparty risk
If you are an experienced cryptocurrency trader, then you must know the benefits of guarding your funds. Since these platforms do not control the funds of the traders, there is less chance of facing an invasion. Even if the platform is hacked, the liquidity providers will only be at risk.
Counterparty is another risk that may happen when a third party gets involved in the transaction process and does not fulfill the part of the dealings. Since the DEXs operate without the involvement of any third parties and use smart contracts, the counterparty risk is eliminated.
Disadvantages of DEXs
Although there are numerous advantages of using decentralized exchanges, there are drawbacks as well. Especially, if anyone lacks sufficient knowledge regarding the DEXs, blockchain, and trading, we strongly recommend him to stay away from these platforms. Here are the cons of DEX platforms.
- Knowledge is a must
Every trader who wants to start his cryptocurrency business on the DEX marketplace should have good knowledge about tokens and smart contracts. He must know about the wallets and security-related issues to make sure his funds stay safe. Remember that only the traders are held liable for losing their funds. Therefore, without having good knowledge, you may commit several errors, which will lead to a great loss of your currencies.
- Vulnerabilities of smart contracts
Smart contracts on these platforms are available publicly. Hence, anyone can take a look at the codes. Without this, smart contracts are often audited by reputed organizations that secure these codes. Since these processes are done manually, exploitable bugs can easily slip the audits and review process.
Our Decentralized Exchange Development Services
We provide world-class services with all-inclusive features for DEX development. These are our offered services –
- User-friendly interface
Our skilled developers include an interactive and feature-rich interface for your DEX platform. It will help you with an error and glitch-free trading experience on this platform.
- Secure transactions
We are aware of your transactions, and hence, we always make sure that our clients have secure trading and transactions. Our developers create strong trading scripts that contain several options. As a result, your wallet cannot be hacked easily or become vulnerable to any digital bugs.
- Requirement analysis
We pay close attention to meeting the demands of needs and suggestions of our clients. With the assistance of our analyst, the clients will get all the ideas about the cryptocurrency marketplace.
We have experienced web designers who will sincerely design your DEX trading platform. A complete and well-designed website will help you trade easily with others.
- Reliable DEX platform
You should now know the importance of smart contracts for decentralized exchange platforms. Since DEXs are handled manually, you have to manage everything smartly and without any errors. We help our clients to get smart contracts on the platform and make sure that there are no malicious activities.
- Quick trading
We make our users trade quickly with our DEX platform. Our built platform will help you sell the bitcoins super fast within a very short time. As a result, you will get the chance to sell the coins at the best price.
Decentralized exchange platforms are becoming very popular because these platforms help traders to trade cryptocurrencies without the involvement of any third parties. Although there are many advantages of DEXs, there are a few limitations. Remember that you have to handle every step manually. Hence, you have to be careful because a single mistake can ruin your wallet. Our DEX platform developing team is one of the most reputed teams that will build an attractive decentralized exchange platform for you. If you want to trade on this marketplace and look forward to building a DEX platform, please feel free to contact our team.