1. What is DEX?
A decentralized exchange (DEX) is a peer-to-peer (p2p) online service that allows direct cryptocurrency trading between two parties.
Decentralized cryptocurrency exchanges aim to solve the problems that exist in centralized exchanges. They establish p2p markets directly on the blockchain, allowing traders to store and operate funds independently. Users of such exchanges can conduct crypto-currency transactions directly with each other – that is, without the involvement of a third party.
Decentralized services are monitored automatically or by participants. Asset security is provided by distributed ledger technology (DLT) – in general, the majority of the following blockchains are used for DEXs: Ethereum (EtherDelta, IDEX, etc.), Graphene (BitShares, CryptoBridge, etc.) ) or blockchains powered by other cryptocurrencies (Waves, Switcheo, etc.).
2. What is the difference between DEX and centralized exchange?
Centralized exchange – where users must be verified, and their coins are kept in accounts belonging to companies. Decentralized exchanges are the exact opposite.
Centralized exchanges are regulated by a particular company or person focused on making a profit. Such exchanges are responsible for protecting their user data and trading information. They fully control the operation of the platform and independently make important decisions for the development of the service.
In contrast, decentralized exchanges are managed automatically or semi-automatically with the participation of platform participants in the key decision-making process. Such platforms provide the technical ability to directly interact between participants, and use distributed registers to store and process all – or nearly all – data. A decentralized exchange does not store users’ funds or personal data on its servers, it only serves as a platform to search for matches for the purpose of buying or selling.
3. What are the advantages of DEX?
Most of the advantages of decentralized exchanges stem from their distributed structure and lack of a single control center.
Security: Decentralized exchanges do not store user assets. Therefore, hacker attacks or the collapse of the exchange cannot lead to the loss of funds. Since they don’t have a single point of entry, everyone can access all assets and data, hindering the hacker’s work and rendering an attack pointless, which distinguishes DEXs from DEXs. Centralized exchanges are frequently hacked.
Low Risk of Manipulation: Another advantage of this type of service is the minimal risk of price manipulation or falsifying trading volumes, since there is no centralized structure that easily leads to manipulation inside the exchange. Translate.
There are no personal accounts on the decentralized exchange, no verification and even no need to specify an email address, so users’ personal data cannot be stolen. This structure makes distributed registry-based services more anonymous than exchanges that require user authentication for KYC compliance and anti-AML AML purposes.
High independence, independent of regulatory authorities: The distributed architecture protects the decentralized exchange from local or international government interference. In the case of a centralized structure, regulatory compliance means that the exchange can be completely or partially blocked, in which case the service is limited in terms of location or options.
Accessibility to different projects: Contrary to its centralized brother, a decentralized exchange not only supports the ordering of orders for existing cryptocurrencies, but also create new transactions directly in the system. This allows startups to provide minimal liquidity, without paying high fees for placement on major platforms.
4. What are the restrictions on DEX?
The distributed structure of decentralized exchanges and the fact that all users control their own funds are factors that contribute to some of the difficulties.
Inability to restore access: For example, due to the lack of KYC processes and the ability to cancel transactions in the event of a broken password or loss of private keys, users can recover their data and return their accounts. produce. Chargeback and refund procedures are not compatible with distributed registration. Users who perform an operation by mistake or lose control of their keys will no longer be able to restore their access.
Limited Options: Many options for traders such as stop loss, margin trading or re-lending are not available to users of most DEXs. Since many decentralized exchanges are managed by smart contracts, cryptocurrencies that do not support smart contract interaction cannot bargain with them.
Low liquidity: Decentralized exchanges often have a much smaller liquidity pool than centralized websites. Thus, while the Bitshares decentralized exchange has a daily volume of 197 BTC, the same parameter in Binance reaches 227,123 BTC.
Binance Centralized Exchange Trading Volume vs. DEX
Such a difference is due to the fact that traders prefer centralized services, where the choice of instruments, currency pairs and orders is much larger than on DEXs. As a result, the decentralized service falls into a vicious circle – i.e., has very few users due to low liquidity, while achieving liquidity is impossible without a large number of traders.
Scalability issues: A large number of people wanting to trade cryptocurrencies inevitably causes network overload and delays, and other problems that centralized exchanges are also facing. face.
No support services: By definition, a decentralized exchange cannot have a back-up service that processes transactions or user accounts. When choosing such an exchange to trade cryptocurrencies, users are solely responsible for their funds, and in the event of loss of their private key or a mistake in the transaction, they will not be able to get support. The lack of support also means a sharp increase in user requests, which will lead to scalability difficulties and possibly increased operator response times in the future. in case of technical problems.
Speed Limit: Transactions take time to be checked and confirmed on the blockchain, and the processing time does not depend on the exchange but on the miners. Since DEXs are less popular than centralized exchanges, users can have a hard time finding someone to match their buy or sell orders – or make a deal at a good price. . It can be even more difficult to buy or sell new coins, or those with low trading volume.
5. I have never used a DEX, but I have traded on Bittrex and Huobi. Is it difficult to get started?
Decentralized exchanges are more complex and require study of some technical aspects, which is partly related to the disadvantages outlined above.
The majority of DEXs operate on the Ethereum platform as a “decentralized autonomous organization” (DAO) or a decentralized application (DApp), using smart contracts and the Ethereum blockchain. This means that transactions must be paid for in gas, and users must know which value to choose so that the transaction does not stall and is processed on time.
Top 5 DEX exchanges by market share
The rules for placing orders are also slightly different from what centralized service users might be used to. The transaction system mechanisms communicate between orders in rows. All transactions are personally signed by the user via their private key without the involvement of the exchange.
Some exchanges issue their own tokens that perform different roles in the system’s functionality – from paying a commission to investing in a project. For example, on the Waves platform, popular currencies such as Bitcoin (BTC), Ether (ETH) and Litecoin (LTC) are traded in pairs with the internal asset WAVES, which is also used to pay commissions and other benefits. other payments.
Users may also experience slower uptime when transacting on a decentralized website. The reason is that the delay occurs between the time when a blockchain transaction is made and when it is validated.
6. Can an exchange be fully decentralized?
Most exchanges today claim to be decentralized, but in reality they are not.
The simple fact is that many DEXs use their own servers to store data and exchange applications to buy or sell user assets, but the private keys are held by the users themselves.
As a result, decentralized exchanges have centralized components that give the government control over how they operate. A notable example is the exchange IDEX, which prohibits residents of the state of New York from trading on the platform.
For the same reason, some exchanges can be hacked and hacked. Charlie Lee, the creator of Litecoin, said that an exchange cannot be decentralized if it has the potential to lose or freeze customer funds. The announcement came on his Twitter after decentralized exchange Bancor was hacked on July 9, 2018, and lost $13.5 million worth of assets.
A Bancor wallet was hacked and that wallet was able to steal funds out of their own smart contract.
An exchange cannot be decentralized if it has the ability to lose OR freeze customer funds. Bancor is capable of doing BOTH of those things. It is a misconception of hierarchy.
– Charlie Lee [LTC⚡] (@SatoshiLite) July 10, 2018
7. Is there a dispute resolution process?
The main problem with DEX regulation is that, in most cases, such exchanges are not controlled by a specific legal entity or individual.
Since DEXs are not required to follow regulations, this leads to problems identifying who is responsible in the event of a breach, difficulty in monitoring trading activity or identifying possible violations. For the same reason, some of the rules that currently apply to centralized exchanges can also be applied to decentralized exchanges.
In the US, regulators are trying to adopt a legislative base that already exists in Singapore, the authorities are trying to create a new regulatory framework for such exchanges. However, there is no clear position regarding DEXs in these countries, while in others, decentralized exchanges are not regulated at all.
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