Blockchain can behave as a powerful equalizing force for the globe through a peer-to-peer connection. It gives users equal benefits to use the facility.
Decentralized exchange infrastructure will play a pivotal role in speeding up transitions with a financial system where individuals can transact directly, peer-to-peer, without the need for intermediaries.
However, for insufficient knowledge and technical know-how of the blockchain technology, exchanges provided a good ground for the ordinary users to bypass the technical difficulties in understanding how to directly use the platform.
This time, another twist to it was the introduction of centralized exchanges. These exchanges defeat the goal of the creation of cryptocurrency which is intended to allow for peer-to-peer transactions with no middleman in-between.
To comprehend how distributed exchanges work, there is first, need to know what blockchains are and how they operate conceptually.
Experts and academics of blockchain tend to emphasize their elegant inner-workings rather than the technical details that make them helpful; the practical information behind the system should be considered more.
Simply, the blockchain is a digital ledger of records that store every transaction that takes place in the network. The peer-to-peer transaction that takes place goes through a verification process and then registered in the network.
At this stage of the digital currency era, many investors rely on exchanges to have their hands on various digital currencies. Exchanges provide a platform where investors can exchange a currency for another.
They can also buy any virtual currency of their choice with fiat currency by using a credit or debit card or through bank deposits, which is a bit different from trading on the prices using systems like Bitcoin Loophole.
Exchanges serve as an intermediary between the investor and the blockchain. Most exchanges discussed operate on a centralized system. They act as third-party.
Consumers are more comfortable with this approach owing to the limited knowledge many still have about the blockchain.
The Two Types of Exchanges:
- Centralized Еxchanges
- Decentralized Exchanges
So far, the discussion above has been on centralized exchanges where there is a central control from the exchange owners. The utmost aim of the digital currency system is intended to be decentralized and so the need for exchanges to be decentralized.
Decentralized Cryptocurrency Exchanges
Decentralization at an architectural level implies that there’s no centrally controlled server(s) and distribution of the nodes of the networks. Currently, the Blocknet “BlockDX” may be the only truly decentralized exchange, as other efforts do not truly decentralize.
Many organizations focus on the development of decentralized exchange (DEX) technology and over the years several distinct methods have appeared. What all of these methods have in common is to take away the need for consumers to give up third-party custody of their digital currency.
In other words, DEXs enable cryptocurrency owners to exchange directly with each other on a peer-to-peer grounds without having to trust an intermediary to help carry out the process.
At the moment, no DEX can yet start trading between cryptocurrency and fiat currency because fiat currencies essentially require a trusted party to record account balances.
Aside from fiat sets, peer-to-peer exchanges are easier to achieve when traded tokens or virtual currencies both use the same blockchain to record operations but cross-blockchain exchanges, say around Bitcoin and Ethereum, are also feasible using cross-chain swaps.
Reasons To Care About Decentralized Exchange
1. Decentralized Exchanges Have Their Pros And Cons
- DEXs fulfill the fundamental use of a decentralized asset because it is pointless to use a decentralized asset in a centralized setting that can be downgraded at any time. Exchange centralization violates the entire objective of using cryptocurrencies.
- DEXs will further catalyze the implementation of cryptocurrencies and enable them to flourish.
- DEXs deprive governments and any other regulatory agencies of censorship or control.
- DEXs create a type of bank for crypto customers.
- DEXs respect their users’ privacy and bypass the need to do KYC, registrations, and many other requirements from third-party
- DEXs do not have downtime because they are shared.
- DEXs provide smooth liquidity for several cryptos that cannot be listed on centralized exchanges after ICOs due to multiple regulations laid down by such exchanges.
There are also downsides to DEXs.
Some of the disadvantages are:
- Users are not used to using decentralized facilities. We like centralized facilities more because of comfort, and give up much stuff like privacy, liberty, and so on in that phase.
- They are not so user-friendly currently.
- There are severe liquidity issues.
- There is a shortage of sophisticated trading features like margin trading, stop losses and bot trading.
- Most DEXs are now in their beta testing phase, and due to inadequate testing, customers are at danger of losing their resources.
- There is no central body or scheme of assistance, so it is difficult to attend to your issues.
2. Adoption Issue
Decentralized exchanges are very far from attaining the liquidity, scalability, and functionality that will encourage mass adoption by the majority of users.
0x Protocol and Kyber Network are regarded as a contender for decentralized exchanges in the future. Both are using their inner tokens.
Authorities like taxation and regulatory bodies have no authority over a DEX without centrally handling of the exchange tasks. If DEX’s were to be adopted on a massive scale and replace centralized exchanges, that would imply billions of dollars fleeing tax and regulatory powers.
In effect, it would also imply that users of the platform would regulate the funds instead of ‘rent-seeking’ governments and centralized exchanges. These authorities have already made huge attempts to stop and retain their control of the blockchain revolution, such as banning crypto by India and China.
Other efforts to maintain control include, without much transparency, government-run digital currencies, such as Venezuela’s investment-backed Petro cryptocurrency.
Also, traditional super-corporations are building blockchain ecosystems for approval, such as IBM.
3. Dex Has A Strong Prospect As The Fure Of Exchanges
After reading DEX’s downsides, you might say that DEX’s won’t succeed. But it should be taken they’re the only way cryptocurrencies can survive and flourish. Ultimately, the kind of advantages DEXs provide will overrun the deficiencies.
And latest incidents such as China’s ban, Korea’s ban, and Russia’s ban give the more reason the need to develop DEXs. And this is already leading to a fast proliferation in crypto space of DEX projects.
Using cryptocurrencies implies taking care of your crypto funds and being your bank. But if you continue to use centralized exchanges you’re effectively putting that reality at risk. This is because they become the custodians of our resources from the time we begin using these centralized exchanges, and we are no longer in control.
For the uninitiated, Decentralized exchanges are exchanges that do not allow customers to have full control of their crypto funds and keys instead of keeping those keys in a centralized database or server.
Decentralization is the focal aim of creating digital currencies. The future of trading on a decentralized exchange is right here with us. The time is about now for all exchanges to encourage a move to attain the goal. Are you trading on a decentralized exchange yet?
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