Decentralized exchanges and their role in the cryptocurrency world

Decentralized exchanges and their role in the cryptocurrency world

All operations with cryptocurrencies are made online, so the number of different services for buying, exchanging and selling coins is growing, and decentralized exchanges will occupy one of the main places one day. What these resources represent, how they work, and all their pros and cons - this information is of interest to all novice traders and people who would like to know more about the world of cryptocurrency.

Table of content:
- Decentralization technology, its functions and opportunities
- How do the modern crypto exchanges work?
- CEX and DEX: their advantages and drawbacks
- Conclusion: decentralized systems of the future
 
Decentralized technologies and their main features
 
Most systems in the nature and human society have a centralized character, i.e. obeys the main element. In many cases, especially with regard to the laws of the universe, one cannot do without such a scheme, but in the financial and business environment there is a risk of monopolization. This is already a direct way to impose exclusively their own conditions before the subordinate structures, to dictate rules and laws.
 
The main idea of ​​bitcoin is decentralization. Simply put, this virtual asset is not subject to a central authority, a state or a private company. Even such an important task as emission is carried out independently of any center. All transactions are made anonymously, but at the same time as honestly and transparently as possible for each of the participants.
 
The basis of decentralized monetary units, as well as the Internet resources and even entire private webs has become Peer-to-Peer (P2P) technology. This is a new stage in the development of computer and information networks. Members of such a scheme (they are called peers) have the same rights; there are no dedicated servers, since each node performs this function.
It becomes possible to keep working in any conditions.
 
The function of modern crypto exchanges
 
So, we see that the technology of decentralization is actively developing. According to the statistics, new payment systems and cryptocurrencies have a multibillion-dollar market capitalization; they are recognized by numerous states and corporations. Users are attracted by the opportunity to exclude the participation of third parties in transactions of various levels, ranging from the sale of goods and ending with large loans. Currently, most exchanges that offer their services to holders and buyers of crypto are centralized. It means that they are easier to crack, it is difficult to work with the blockchain and they remain under state control.
 
Since the exchanges work outside the blockchain, they can be regarded as separate organizations that deposit participants' funds, and all transactions are not recorded in the blockchain. The security of information and keys are under constant threat, and traders, cooperating with such services, have to agree to additional risks. Decentralized exchanges (DEX) are the subject of active debates in the blockchain community, and technical specialists are actively working on their functionality.
 
What experts see as the advantages of DEX? First, such exchanges will help solve the problems of centralized counterparts. P2P system based on the blockchain, for example, Ethereum, makes it possible not only to safely store assets, but also to manage them. However, one must face the facts and understand that a completely decentralized structure is still a utopia. Centralization allows getting out of the situation "here and now", and a full-fledged peer-to-peer structure is a technically unrealizable and expensive project. Developers get out of the situation, using semi-decentralized exchanges, which represent a transitional model that has adopted the best aspects of both systems. The pros and cons of these structures will be discussed below.
 
CEX vs. DEX: pros and cons of the systems
 
Before talking in detail about the advantages of exchanges, let’s refer to the statistics. The huge increase in the market capitalization of the cryptocurrency in 2017 made it possible to talk about the great prospects of this direction. At the beginning of the year, capitalization was $ 18 billion, and at the end the figure was $ 600 billion. The number of transactions increased 240 times, and their value per day was from 130 million to 30 billion USD. The number of crypto exchanges grew at a huge rate, just as new P2P platforms were opened, and almost the entire volume of transactions passed through exchanges with a centralized management system.
 
How the centralized exchange works
 
CEX is a platform or an application using which traders perform operations with cryptocurrency and fiat money. Also, exchanges work as the sites for sale and purchase of tokens. Thus, CEX acts as an intermediary between the world of the crypto and the traditional financial system. The most popular exchanges are Poloniex, Coinbase, Kraken, etc.
 
In view of the fact that blockchain technology is not used by centralized exchanges, the latter may be non-relevant in the future. These systems have other disadvantages, such as high fragility and the risk of theft, since the exchange, being an organization, is responsible for storing users’ funds in 73% of cases. Only a small part of the services allows customers to store the keys themselves.
 
Centralized exchanges are constantly attacked by hackers, keeping in mind that the number of transactions, and with them the amount of money, is increasing. CEX have a lack of liquidity, sales volumes often remain small with sufficiently high fees. There are many technical failures, payment delays occur due to the heavy workload. Qualification of users remains low; there are still a lot of speculators.
 
Decentralized exchanges and the financial system of the future
 
Keeping users' money on the server is a dangerous thing, because, as already noted, hackers are constantly attacking such systems. Resources, allowing storing users’ keys not on the common capacities, but personally, are of users’ interest. It's about platforms like EtherDelta. This platform has got a simple and clear functionality and offers basic services. Every day 25 million USD in crypto coins passes through the system. Security is the main principle of DEX. The control and management are carried out by means of blockchain, i.e. the technology of cryptocurrency is used. Due to it high transparency and security are achieved, as well as the principle of equality is strictly respected.
 
Those DEXs, which exist at the moment, ensure decentralization only by 50%. For example, private keys and some confidential information are not stored on the servers, while the order books are located on the central node. Difficulties and liquidity are permanent; there are restrictions or a complete lack of the fiat payments. Also in the list of their services there is no possibility of selling futures and other exchange derivatives.
 
Conclusion
 
The creation of an "ideal crypto exchange" is a matter of the future. So far, full decentralized exchanges with a great set of functions, safe and reliable are under development. To develop them, new technical solutions, powerful financing and support from large exchange players are required. Beginners in trading should not trust the tempting offers, which now and then arise on the Internet, because under the DEX a fraudulent resource may hide and its owners just want to steal your keys or private information.
 
 



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