Decentralized cryptocurrency exchanges – a next step
In the last article (“What are Centralized Cryptocurrencies Exchanges”), we looked at how centralized cryptocurrency exchanges work. Numerous thefts and security holes in centralized exchanges have turned developers and users to other, more secure, and reliable digital asset exchange tools. An attempt to address past problems was the creation of decentralized cryptocurrency exchanges (DEX).
Also in the article, we will touch on distributed exchanges, which differ significantly from decentralized exchanges.
DEX – what is it?
Decentralized exchanges are peer-to-peer trading platforms where cryptocurrency and digital asset traders make transactions directly, without transferring control of their funds to an intermediary or custodian.
Most modern data systems in finance are centralized, meaning that they usually depend on a “trustworthy” third party to decide whether a transaction is legal. In contrast, decentralized rosters are designed to operate with many centralized units – instead of only one centralized unit. This means that all information stored and recorded in the registry (often technically implemented as a blockchain data structure) is agreed upon among many independent parties.
In a DEX environment, each transaction on the network (a trade of digital assets between two or more network members) is charged a transaction fee together with the trade commission. There are three main types of decentralized exchanges:
- automatic market makers,
- DEX order books;
- DEX aggregators.
They all allow users to trade directly with each other through smart contracts. The first decentralized exchanges used the same type of order book as centralized exchanges.
Differences between CEX and DEX
DEX has a fundamentally different architecture than centralized exchanges such as Coinbase and Binance. Centralized exchanges require users to enter currency into «hot purses», which are centralized repositories. A centralized exchange supports private cryptographic keys that unlock these wallets.
By contrast, DEX is not related to storage: cryptocurrency remains in each user’s personal wallet. DEX performs transactions through computer programs that are automatically executed when certain conditions are met. Because the operational footprint of many DEX is limited to software stored in a publicly available chain of blocks, they often have no legal identity.
So, DEX has three key advantages over CEX:
1. Decentralized DEX structure: cryptocurrencies are distributed in users’ wallets rather than stored in hot wallets, so DEX is more resistant to large-scale theft than centralized exchanges.
2. Users can switch to other exchanges if they do not like policies and practices.
3. Privacy and confidentiality: because they operate in a global peer-to-peer network without official registration in any jurisdiction, they may evade regulation and incur lower compliance costs.
What are the potential disadvantages of DEX?
Does the DEX have drawbacks? Of course, like any software environment, it has its specifics and, unfortunately, weaknesses.
Among the most common reproaches against DEX:
- Sophisticated user interface and navigation;
- The potential vulnerability of computer programs and smart contracts. While smart contracts may work as intended under normal circumstances, developers may not anticipate all rare events, human factors, and hacks.
Decentralized Exchange is not the last point. What’s next?
Today, DEX is at the forefront of the digital asset world, accumulating innovations and cutting-edge technological tools. Decentralized exchanges were created as a response to the limitations of centralized and made available to a wider audience of crypto enthusiasts and, despite their limitations, are gaining popularity.
But obviously, the progress of digital asset exchange has not stopped. Full digital asset allocation – fully distributed exchanges – is now gaining momentum.
Technologically fully distributed exchanges are implemented based on networks of blockchains that protect privacy (this is DIVA technology – the so-called “blockchain-based, distributed business logic”) and where users keep their funds on their own devices.
In the following articles, we will explain how the diva.exchange project builds its own network based on the best practices of secure blockchain and fully distributed technology.
THIS IS DIVA.EXCHANGE
The non-profit association diva.exchange, Switzerland, uses a barrier-free and collaborative approach to create free banking technology for everyone. The open source technology ensures the privacy of all participants in the financial system of the future. The blockchain-based system is fully distributed. Everyone can participate in diva.exchange.
Diva.exchange is committed to the belief that only commercially free technology can reliably protect user privacy.
Collaboration with the scientific community plays an important role in the development of diva.exchange. The results of diva.exchange research are constantly being validated by academic institutions and publicly presented at specialized conferences.
LEARN MORE ABOUT OUR WORK
All technical information is available at: https://github.com/diva-exchange/
I2P beginner’s guide and installation guide:https://www.diva.exchange/en/privacy/introduction-to-i2p-your-own-internet-secure-private-and-free/
All videos are here: https://firstname.lastname@example.org:d/
Introduction to I2P: https://en.wikipedia.org/wiki/I2P
Testnet of diva.exchange: https://testnet.diva.exchange
If you still have questions you can always find us on Telegram: https://t.me/diva_exchange_chat_de (in English, German or Russian)