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WHAT ARE DECENTRALIZED EXCHANGES, AND HOW DO DEXS WORK?

Many people are using the centralized exchange to trade and store their crypto, but the concern about the security of centralized exchange is increasing. I hope so you know that CEXs function in the same way as traditional banks. Centralized exchanges are owned and can be operating with a significant third party that maintains ultimate authority.

But in today’s world, a decentralized exchange is in demand. DEXs such as UNISWAP, AAVE, and CURVE are well-known in today’s time. They are the leading DEXs. But if you want to know what decentralized exchange is, then you are in the right place. Decentralization is a vast and relevant topic in the new financial world.

After we took a look at centralized exchange, we now have to go over decentralized exchanges. Now we will discuss how they work. Obviously, we are always keeping an eye on their importance and impact on you as an investor. Let’s discuss without wasting your time.

What is a decentralized exchange?

We can also use the word DEXs for decentralized exchange. But firstly, we should know what decentralized exchange is. A decentralized exchange is a peer-to-peer (p2p) cryptocurrency trading market on the blockchain. It serves as a trading matching or routing algorithm.

Users can buy and sell crypto directly and maintain crypto wallets themselves without a central intermediary. In this exchange, buyer and seller can easily trade now without involving a third- party.

We have covered the biggest question of what decentralized exchange is but have not gotten its benefits. Let’s talk about it.

Benefits of decentralized exchange

We know that when traders are accomplished then, transaction fees are high so, trading on DEXs can be expensive. But it has many benefits. Let’s talk about its advantages for traders.

Secure

The most important benefit of this exchange is security. As DEXs do not have centralized wallets, users have full ownership of their funds. It also minimizes potential hacker attacks to steal user’s funds.

More accessible and inclusive:-

The other advantage is no restriction on the use of service in any location. So, it is more accessible everywhere.

High privacy 

In a decentralized exchange, no KYC is needed, so users can remain anonymous. We know that DEXs do not hold on to user’s funds or information, so the third party is unable to interfere.

Now you are familiar with the term decentralized exchanges and its benefits. But I guess you want to know how decentralized exchanges work. Don’t worry, we will discuss it here. Let’s start.

How do DEXs work?

I hope so you are familiar with that decentralized networks give users much more control over the rules and maintenance of the network. A decentralized exchange has many types, but we will discuss here the main types.

  1. Automated market makers
  2. Order book DEXs 
  3. DEXs aggregator

In all types of exchange no need for a third party. The traders can use their wallets. Now we explain the types one by one. Let’s start.

Automated market maker

It is also known as (AMM). They are smart contracts that create a liquidity pool of tokens, which are automatically traded by an algorithm. The AMM imparts on blockchain-based services that give information from exchanges.

Order book DEXs

It is an important part of trading. We can say that it is a collection of open buy-side and open sell-side orders for the financial instrument. Order book DEXs have two types

  • On-chain order book
  • Off-chin order book

Order book assembles record of all open orders.

DEXs aggregator

DEXs aggregators are utilized in some different processes to solve the problem of liquidity. Several aggregators use liquidity from a centralized platform to give a better experience to users. It also protects users from the pricing effect.

Thus, decentralized exchanges wide used today. If you need any information regarding this, don’t hesitate to leave a comment here.

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