What is a Decentralized Exchange (DEX)?
DEX is a completely peer-to-peer marketplace. It is a place where users without any intermediaries can be able to trade non-custodial cryptocurrencies for the convenience of custody and transfer of funds, making them transparent and more secure. That is, the management of funds and trusts does not fall entirely on the central figure.
Instead, users of the exchange can always maintain control over their assets. However, it has come across as a convenience that maintains anonymity, a high level of security, and even confidentiality while operating in this type of exchange house. Check out here if you’re curious about how oil companies are using blockchain to improve trade.
DEX has emerged as a cornerstone for decentralized finance (DeFi). It can function as a major “money Lego”, a place where permissionless composability can result in more sophisticated financial products. But how can we get away from decentralized exchanges or traditional exchanges and what benefits do DEXs provide us? To know more about the history of all these decentralized exchanges let’s take a look at some of the things we have discussed below.
How is a Decentralized Exchange Able to Work?
Smart contracts are used by this exchange, with the help of which trade is facilitated between people, but if seen, it does not assume ownership of their currency. The DEX utilizes techniques to manage these sorts of circumstances including automated market creators, an off-chain order book or an on-chain order book. DEXs deal with this easily by using one of these methods.
On-chain Order Book
Here if we talk about an on-chain order book, it is a place where all the transactions to be done are recorded on a blockchain. It may even include a request to cancel or buy an item itself as well as a transaction. Furthermore, it is considered the pinnacle of decentralization, but the need to keep every bit of information on the blockchain can make it even more time-consuming and costly.
Off-chain Order Book
On the other hand, if we talk about the off-chain order book, the whole process is done through. Here the final transaction is resolved in the blockchain. This has emerged as a solution that can come in handy in some of the security difficulties of centralized exchanges as orders cannot be stored on-chain. Moreover, it is not as expensive or dull as the on-chain order book.
Automated Market Maker (AMM)
Order books are not used by Automated Market Makers (AMMs). , Also, if you use Chainlink tokens and are considering acquiring Compound, you may need to find one who already has Compound as well as an order book and Also consider trading at the agreed price. AMMs can eliminate counterparties as well as replace them with price-setting algorithms, With the help of which you may be able to trade Chainlink for the free compound from the other end of the exchange.
User interaction with DEX
Unlike centralized exchanges, there is no account available, special restrictions can control who can use a DEX or Know Your Customer check. Visually they are permissionless and trustworthy, a place where they are allowed to be used by the person with the bitcoin wallet and funds. Thus, clients can’t hold any digital money on a decentralized trade; what’s more, they should be associated with different cold or hot wallets to hold the digital money, like MetaMask, a non-custodial program wallet.
In addition, once your wallet is linked, you will be able to anonymously trade any cryptocurrency you wish to keep in the wallet. However, dApps and related protocols can also be accessed within a decentralized exchange, allowing it to be fully converted into a DeFi (decentralized finance) gateway as well.