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How a Decentralized Exchange Works and Why You Should Use One


 How a Decentralized Exchange Works and Why You Should Use One!?

in this post we will talk about How a Decentralized Exchange Works and Why You Should Use One.

Many investors and traders in the cryptocurrency space are interested in using decentralized exchanges, or DEXs, as opposed to their centralized counterparts like Binance and Bittrex. This is because they do not use third parties or intermediaries that control user funds and, therefore, are not at risk of being hacked or suffering other attacks on their infrastructure. This guide explains how DEXs work, how they differ from one another, and why you should be using them.

What Is a Decentralized Exchange?

A decentralized exchange, also known as a DEX, is an online platform where users can buy and sell cryptocurrency without a middleman or counterparty risk. It’s often touted as being safer than centralized exchanges because of its transparent nature; all information about funds being transferred on these platforms is visible to anyone who uses them. If you’re interested in getting into cryptocurrency but don’t want to jump through all of the hoops that come with using a centralized exchange, DEXs are likely worth your time.

With an increase in the popularity of decentralized exchanges, many are wondering what makes them so special. As with any new thing, there’s an abundance of misinformation on how decentralized exchanges work, which is why we’re going to clarify some of it here. It also allows you to make a more informed decision when choosing between using centralized or decentralized exchanges. A decentralized exchange is actually pretty simple: they allow users to trade directly with each other without relying on a third-party service that holds onto user funds. An example would be trading bitcoin for ether directly through smart contracts, not putting trust into an exchange to hold onto your assets safe while trading.

The history of cryptocurrency trading has been turbulent. From Mt. Gox to Bitfinex, to some lesser-known exchanges that simply shut down without warning their customers, centralized crypto exchanges have been rife with theft and fraud. Many entrepreneurs are choosing decentralized exchanges (DEXs) as an alternative to these failed platforms. Here’s how DEXs work: A normal exchange works like any other e-commerce site; you register for an account, deposit your funds, and then you can buy or sell cryptocurrencies on that platform.

 A DEX is simply an exchange that doesn’t hold onto customer funds. Instead, trades are executed peer-to-peer (P2P) via an automated process. Unlike centralized exchanges, you never have to give control of your private keys to a third party. Instead, you have complete control over your funds at all times, meaning you keep custody of your cryptocurrencies no matter what type of exchange you use. If a centralized exchange becomes insolvent or hacks happen like Mt Gox in 2014, people can lose their funds as was happening. We see why people would want to use decentralized exchanges as alternatives to centralized ones—and why they may be here to stay.

The Benefits of Trading on a Decentralized Exchange

The key advantage of decentralized exchanges over centralized exchanges is security. Because decentralized exchanges do not hold your tokens but rather facilitate a trade, there is no risk to you of losing them to theft.

  •  In addition, decentralized exchanges often have lower trading fees as they are not run by a company.
  •  They are also usually open 24/7 so you can trade whenever you want.
  •  In fact, you don’t even need to sign up for some decentralized exchanges in order to use them.
  •  It’s important to note that there are disadvantages to decentralized exchanges as well, including lower liquidity.

 A decentralized exchange is only as safe as its infrastructure. The server it’s running on, your Internet connection, etc. should all be secure. But if the person operating the server has malicious intent, then the security of your funds could be compromised. Other drawbacks include a lack of customer service and low liquidity.

In order to get around these drawbacks, one option is a hybrid-decentralized exchange where users control their own private keys while trades take place on a public blockchain with automated matching features.

The Advantages and Disadvantages of Centralized vs. Decentralized Exchanges

Both centralized and decentralized exchanges have their own set of pros and cons. Centralized exchanges have higher trading volumes than decentralized ones, but they tend to suffer from hacks because they often hold onto user funds. On the other hand, decentralized exchanges are less prone to hacking but don’t usually support fiat currencies or provide high levels of liquidity. There’s no one perfect exchange for all users—one answer won’t suit everyone. It pays to do your research before deciding which you prefer.

  •  In general, centralized exchanges tend to be more user-friendly than decentralized ones because they are designed with beginners in mind. They’re also typically faster, more responsive, more transparent, have better customer support, and provide higher levels of liquidity.
  • Another reason to use a decentralized exchange is security. Since there is no middleman to hold your funds, you don’t have to worry about them getting hacked. But, if someone were to hack into your account on a DEX, they would only get access to their wallet address. That means they could steal all of your coins if you haven’t properly secured them by moving them off exchanges into private wallets with strong passwords.
  •  On top of that, centralized exchanges typically charge lower fees than decentralized ones. While most decentralized exchanges do not charge trading fees, their withdrawal fees can be considerably higher.
  •  Finally, centralized exchanges have an edge over decentralized ones in terms of trading volume. There are simply more cryptocurrencies being traded on centralized exchanges than there are on decentralized ones.

Top 5 most popular decentralized crypto exchanges

  • IDEX. International digital asset exchange with hundreds of token pairings available. 
  • Waves DEX. Crypto-to-crypto trading of WAVES, BTC, ETH, and other tokens.
  • Bisq Network: A decentralized marketplace for buying and selling cryptocurrencies without a middleman.
  • Bitcoin Market: Buy & sell bitcoins in 33 countries.
  • OpenLedger DEX: Trade any token(Bitcoin, Ethereum) or ICO(Waves, Bitshares) safely on an open ledger (DEX).

How a Decentralized Exchange Works

Unlike centralized exchanges, decentralized exchanges do not hold funds or private keys on behalf of their users. Instead, trades occur directly between peers or with relayers (who typically charge fees). Relayers are matchmakers that pair trade orders for free but are paid through trading fees by those who issue them. They gather signed orders from users into large pools called liquidity networks; other users can then trade freely from these pools. When someone wants to withdraw his/her funds from an exchange, he/she simply trades back to ETH or another ERC20 token and requests a withdrawal. As long as there is someone else willing to trade with them (or buy back in), they can complete their withdrawal request immediately at market prices--no middleman necessary!