When Satoshi Nakamoto released Bitcoin in 2009, the world entered a new era of decentralized systems. People all around the globe realized that they can control their money without intermediaries like banks or governments. The idea of a totally decentralized economics is on its way to being fully established worldwide, but at the moment, its implementation remains quite limited for a number of reasons. We still can’t get rid of third parties who control our financial information.

The door-opener to the blockchain-based world is turning trading platforms for cryptocurrencies into fully decentralized marketplaces. Decentralized exchanges or DEXs are pretty popular among fans of crypto but unknown to the rest. We will figure out how DEXs work, what are their main features, and what are their chances to replace traditional exchanges.

Decentralized Exchanges in a Nutshell

Simply put, DEXs are peer-to-peer trading networks where users don’t send money to storages and connect with each other instead. These platforms are designed in a way to match the orders of users. All decentralized exchanges are blockchain-based. The main advantage in comparison with centralized exchanges is a higher level of security. So far as these websites don’t store coins, hackers can’t steal money from them.

As far as the very essence of cryptos is their decentralization, it seems only logical to deal with coins at the decentralized marketplaces. Currently, it’s true only to a certain extent. Before entering the world of crypto trading, read some manuals and articles, check ICOs ratings and exchanges reviews in order to find the trusted platform.

Decentralized Exchanges for Geeks

Paradoxically, DEXs aren’t totally decentralized because this would be extremely expensive. Nowadays, DEXs work like hybrid platforms with central servers. These servers store transaction logs but never deal with private keys or any other sensitive information.

Despite some centralized elements, DEXs provide all the advantages of the blockchain technology. Developers of each exchange may launch their own blockchain or create the project powered by already existing ones like Ethereum. Regardless of the type, the system must support buy/sell orders and connect users by their offers. By the rules of blockchain, all transactions are recorded and stored in such a way that no-one can change the information but every network participant can access it.

For better security and legitimacy, DEXs also support smart contracts or their counterparts. This feature allows users to create contracts that can be customized and specify all conditions of each deal.

To summarize:

• DEXs are hybrid platforms which never store sensitive data.

• DEXs are based on different blockchains and record information using the blockchain technology.

• DEXs match buy/sell orders placed by users.

• DEXs utilize smart contracts to create unbiased trading systems.

The Future of DEXs

Now, centralized exchanges serve 99% of trading transactions thanks to their convenience and outstanding liquidity. Leading brokers and trading platforms control users’ money, are vulnerable to phishers and hackers, and can be banned by governments. There are a lot of risks apart from simple market volatility. That’s why the community needs decentralized exchanges.

Advantages and Perspectives

Pros of decentralized systems are obvious:

• Direct deals only. DEXs work like peer-to-peer systems, so no third parties are involved. Users are connected with each other by the system that simply matches buy and sell orders. It’s safe because exchanges don’t control coins or private keys.

• No governmental control. Banks or governments can’t get access to personal information of traders. Even more, DEXs can’t be blocked because they are not regulated by laws.

• High level of anonymity. Systems record information about transactions but nothing about traders’ identities. Crypto wallets and peer-to-peer networks are totally anonymous.

These three key points prove that decentralized exchanges match the Satoshi’s idea perfectly. But why the overwhelming majority still uses CEXs?

Drawbacks and Limitations

Overall, the disadvantages of DEXs are related to the issues of education and technology.

Users may simply not know about decentralized exchanges. The majority of traders and investors are not even aware of the existence of DEXs. Also, not every trader is familiar with proper security measures. They may not realize the danger of losing their private keys.

Speaking of technologies used by DEXs, they may have some problems:

• Convenience. Exchanges have a complicated interface and a limited number of trading tools. As a result, both newcomers and experts don’t find DEXs attractive and don’t switch to them.

• Scalability. Blockchains are different but most of them face problems with a high load and can’t handle a lot of operations.

• Fiat acceptance. Decentralized marketplaces can’t buy or sell fiat money. They may introduce fiat-backed tokens but it’s a partial solution.

• Compatibility. Not all blockchains used by DEXs are cross-compatible.

• Liquidity. All these issues lead to a low popularity and, respectively, a low trading volume.

The New Era

Will DEXs replace regular centralized platforms or will they co-exist? Currently, there are more than 200 decentralized exchanges featured on the list by GitHub. We can accept the fact that the world moves to a decentralized future so far as blockchain projects and cryptocurrencies become more and more popular. The rise of decentralized exchanges seems inevitable, but their developers should solve the main issues and attract regular customers. After DEXs become understandable, they will easily cut out their centralized opponents. Considering the exponential growth of all new technologies, DEXs may become the leading marketplaces in two years or even faster. Will they? We’ll see.

Julia Beyers