Decentralized Exchanges (DEXs) are one of the most promising use cases of blockchain today, driving significant decentralized crypto exchange growth across the industry.

This is because blockchain plays a big role in keeping track of digital assets in a decentralized way and also deals with most of the problems brought about by centralized exchanges. We’ll delve deeper into how exactly it does this at a later stage of this decentralized crypto exchange guide.

At this time, decentralized exchanges manage roughly 1–4% of the total trading volumes, and this is expected to grow between 5–20 times more in the next 24 months assuming that the trading volumes don’t change and there is a constant correlation between the token price and the projected usage.

If you’re looking to understand what DEXs are, and how they operate in the cryptocurrency space, you’re certainly in the right place.

In this decentralized exchange review, we’ll look at:

• What are decentralized exchanges,
• The problems of centralized exchanges and how decentralized ones counter them,
• The problems faced by decentralized exchanges and,
• A few examples of DEX exchanges.

Without further ado, let’s begin!

What is a Decentralized Exchange?

Before I put it in the simplest terms possible, here’s a more detailed explanation of what a decentralized exchange is:

https://youtu.be/PTD7MxsDeY8

A decentralized exchange is a digital assets market that does not rely on any third-party individuals or organizations to hold customers’ funds; instead, the platform offers a direct peer-to-peer trading mechanism that allows users to process their transactions on an automated system. This model has fueled significant decentralized crypto exchange growth by empowering users with full control and transparency.

This type of exchange runs on proxy assets (representing shares in conventional companies) or through a multi-signature escrow system or tokens (digital assets that represent certain cryptos or fiat currencies) and other solutions currently under development.

So, what exactly constitutes such an exchange?

Let’s find out!

Requirements for a Decentralized Cryptocurrency Exchange

A Decent Number of Users: To prevent price manipulation and ensure high liquidity, an exchange must have many buyers and sellers.

Fast Transaction Speeds: Markets move quickly, with asset prices changing within seconds or minutes. Traders need to place and execute transactions as fast as possible.

Few Trading Pairs: A stable crypto exchange should limit the number of trading pairs. This helps avoid arbitrage, which can harm the market over time.

User-Friendly Interface: Different investors have different needs. The average user should find the platform easy to use with minimal complications. Advanced users, like those from Wall Street, may prefer detailed charts and analysis. The exchange’s usability largely depends on its interface.

Scalability: Exchanges must have the right technology to handle high trading volumes without slowing down. If volumes spike, the platform should remain stable.

Affordability: Efficient exchanges balance transaction fees to keep trading affordable while generating enough income to maintain operations.

Decentralized Exchanges

Despite decentralized exchanges not being fully embraced by all sectors of the economy, there are a couple of platforms that have managed to capture the attention of traders from various factions. Let’s have a look at a few successful exchanges.

Bitsquare: This is an open-source platform that allows users to buy and sell cryptocurrencies such as Bitcoin without the need of having to involve third parties. This ensures that the transactions are executed in a direct way, between the buyer and the seller of a digital asset. The platform relies heavily on one of the common features of DEXs, which is the multi-signature escrow system to enforce transparent trading on its platform.

NXT: This is one of the first 2.0 cryptocurrency projects that enables its user to issue and trade digital assets. However, on this platform, users can only exchange assets for the NXT coin and no other cryptos.

Bitshares and Openledger: Bitshares runs its own native crypto called Bitshares and abbreviates it as BTS on exchanges. The platform allows users to trade Market Pegged Assets with BTS and User Issued Assets. Openledger, on the other hand, is a web-based replica of Bitshares, and both run on the same type of blockchain.

Benefits of a Decentralized Exchange

Low Trading Fees: Decentralized exchanges have low operating costs. This helps keep trading fees low. However, growing traffic in the crypto space sometimes causes higher gas fees. Still, compared to centralized exchanges, DEX fees remain quite affordable.

Enhanced Security: Decentralized systems handle user security differently. Users keep full control of their assets and don’t hand them over to a third party. This makes it nearly impossible for unauthorized users to access their data.

Easy to Manage Assets: Decentralized exchanges let users fully control their portfolios. Users can trade, send funds to friends, or buy products quickly. This is more convenient than centralized exchanges, which often have delays in deposits and withdrawals. Also, many decentralized exchanges support e-commerce, allowing purchases with various crypto wallets.

Advantages of Decentralized Exchanges

In addition to these benefits, here are a few downsides of centralized exchanges that are actually benefits of decentralized exchanges:

Scalability of Transactions: A typical decentralized Bitcoin exchange such as Coinbase can receive up to 250,000 sign-ups each day leading to an increase in trading volumes of an upward of 40% per day. When central exchanges are faced with similar circumstances, they end up with problems since they have a central computing system that ends up straining its operations.

Decentralized exchanges are also highly scalable to minimal barriers to entry as well as favorable trading terms. This enables these exchanges to undergo massive growths in relatively short time spans.

Security Issues: All funds collected by central exchanges are managed centrally; this increases the risk of an attack on those areas that are known to store such assets. And in case they store digital assets in such systems, hackers are likely to have a field day.

But unlike their centralized counterparts, decentralized exchanges are secured by a team of competent persons from all walks of life. This ensures that the best of the talent is used to secure exchanges using minimal resources.

The Downside of Decentralized Exchanges

Limited Exchange Pairs: A lot of times you’ll realize that an exchange doesn’t allow you to directly trade one coin for another, especially when the pair is not among the major coins such as Bitcoin and Ethereum. This sometimes forces users to buy Bitcoin first to use it to buy whatever coin they need to acquire. Acquiring BTC or ETH first and then obtaining another coin or token may lead to higher transaction fees and delayed transactions. Despite there being an effort to put in place corrective measures by some networks such as Bancor in this regard, most cryptos are yet to implement the same on their platforms.

Trade Collision: Blockchain collects transactions into “blocks” before processing them. Many protocols take 5–10 seconds to complete each transaction. When multiple commands are sent at once, only one is processed at a time, not simultaneously. This causes trade collisions. As more users join the crypto space, this issue may get worse.

Front-Running: There is still need for decentralized exchanges to develop a technique for matching buyers and sellers, whether from third-parties or from internal developments. The tech will help prevent “outsiders” finding unconfirmed orders and undercutting them to make quick profits. Ox project has been trying to explore a possible solution of providing a semi-decentralized platform. But whether that will work or not, still remains to be seen.

Conclusion

To make it easier for you to wrap your head around this guide, you need to understand that the most unique feature of a decentralized exchange is that users have full control over their digital assets and are free to broadcast their portfolio to potential buyers. This user empowerment is a key driver behind the rapid decentralized crypto exchange growth. There are no central servers, and all security and privacy of transactions are controlled entirely by each user.

In the end, it makes more sense to have ultimate control over what you own – don’t you think? This is exactly why we’re witnessing significant decentralized crypto exchange growth as more users prefer platforms that give them full control and security.