In the mid-2000s, anyone who said that in less than 20 years the world would witness the rise of a stock exchange using blockchain would be called crazy. And yet it happened. Now the big news is DEX, or Decentralized Exchange. A notable evolution within the blockchain universe, this system allows you to trade assets as on a stock exchange, but in decentralized exchanges, which do not depend on any kind of centralized authority to operate.
How Does Decentralized Exchange Work?
This video explains the workings of decentralized exchanges thoroughly.
DEXes, or Decentralized Exchanges can be defined as exchanges built especially for exchange transactions using blockchain smart contracts. These smart contracts allow assets trade between users using cryptocurrencies such as ETH or others simply interacting with their wallets, without bureaucracy or any middlemen.
Understanding The Process
It is interesting to compare a DEX process to an average stock exchange, for example.
Financial exchanges happen when you trade financial assets or commodities. These assets are held in custody by a central exchange, who takes orders from buyers and sellers for commodities, stocks, etc.
To execute a trade, you must submit an order to the exchange. After, either the exchange puts it onto their order books to be filled later, or even fills the order with an existing order on the books.
Then two things can happen: a maker order, that happens when you make an order which gets put in the order book, or a taker order, which happens when your trade order is filled by taking one that already existed in the books.
DEXes work similarly but using smart contracts on the blockchain. When submitting a trade order to a DEX you are automatically submitting a transaction to their smart contract directly on the blockchain. DEXes also have order books with both maker or taker order, while other DEXes can have currency reserves available for trades or swaps.
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Can I Trust The Process?
This process has been pleasing to many users when it comes to safety. Everyone knows that cryptocurrencies, even though they are not linked to central banks or traditional stock exchanges, have their specific risks. This is due to the high number of hacks and virtual attacks suffered by users in their wallets.
Learn more: Nash: Well-Rounded Solution For Cryptocurrencies
In this sense, DEX brings an interesting innovation, reducing the risk of theft or invasion. Centralized cryptocurrency exchanges are the main targets of hackers and thieves, as it is widely known that they have millions of dollars in funds belonging to users.
Why Is It Interesting For DeFi Users?
Security is the highlight, for sure. The first is the fact that DEX dramatically reduces the risk of hacks, a ghost that haunts any blockchain investor’s nights.
This happens because the funds are left in the wallet until the order is fulfilled, or the funds can be held in a smart contract secured by Ethereum.
What Can Be The General Impact Of The Decentralized Exchange?
DEX will be particularly important for the maturity of DeFi, especially when it comes to asset appreciation over the medium to long term. While many still have some fear of investing in blockchain because they are unaware of the process, DEX can bring many traditional investors into this universe and add even more value to the market.
An unbelievably valuable new tool, DEXes are nothing more than decentralized exchanges. This means that they work like the average stock exchange but managed by smart contracts using Ethereum. The great advantage of DEXes is that they do not need a centralized authority to operate, taking place in a 100% free environment using cryptocurrencies. As more experienced blockchain users may notice, it brings extra security as smarts contracts allow you to impose more rules, run business, and securely handle funds whenever it is needed.