I. What is DEX?

DEX (Decentralized Exchange) is a type of cryptocurrency exchange built and operated in a decentralized manner on the Blockchain platform. DEX allows trading to be done peer-to-peer on the Blockchain network without going through any intermediary organizations.

II. Striking Features of DEX

Basic features of DEX:

• Unlike the traditional centralized system, the decentralized system uses an automated peer-to-peer (P2P) payment network without the intervention of an intermediary organization.
• The amount of assets is always held by the owner and stored securely in the wallet, secured by a unique key. This makes the DEX a “reliable system”. If the funds were held entirely by the owner there would be no need to trust a third party.
• As the disclosure of personal information often happens with centralized trading, anonymity is the key and breakthrough of DEX.

III. Working principle of decentralized exchange

On-chain order books

In a DEX, an on-chain order book is used and there are designated network nodes to maintain a record of orders. It also requires the activity of miners to confirm each transaction.

Off-chain order books

Unlike the on-chain order book, the records of transactions in the off-chain order book will be stored in a centralized entity. They use “forwarders” to help manage these order books. Accordingly, the off-chain order book DEX is nearly decentralized and unlike other types of DEX.

An example DEX that uses an off-chain order book is Binance DEX.

Automated Market Makers (AMMs)

Automated market makers become popular in 2020, fueling the DeFi boom and are used by major DEX platforms like Uniswap, Pancakeswap, and more. AMM uses smart contracts to form automatic liquidity pools to execute trades based on certain parameters

IV. Advantages and disadvantages of DEXs 

1. Advantages

No KYC

KYC has always been considered a mandatory standard of many exchanges. For anti-money laundering-related legal reasons, individuals are often required to submit identification and proof of address.

This becomes a privacy concern for some or quite annoying when the documents you provide are not valid. With a DEX, there is no need to authorize and no one will check your identity. All you need is a crypto wallet to store assets.

No counterparty risk

An important factor that makes decentralized exchanges increasingly attractive is that they do not hold customer funds. Therefore, cases like the hack of the Mt. Gox 2014 will also not put users’ assets or personal information in jeopardy.

User assets are all on the blockchain and are secured by the nodes in the network.

Trade Unpopular and Unlisted Tokens

Users can still trade tokens that are not popular and not listed on centralized exchanges comfortably on DEX exchanges, as long as there is supply and demand.

2. Disadvantages

DEX’s user experience is not good

Although the recently appeared DEX exchanges have improved the most in terms of user experience compared to the old ones. But still can not meet the smoothness like CEX exchanges are doing.

However, we can expect decentralized exchanges to improve in the near future.

Small trading volume and liquidity

If compared directly with centralized exchanges, the liquidity in decentralized exchanges is much worse. This is due to the fact that users rarely use DEX exchanges due to various factors. In a illiquid market, you will have a hard time finding someone who wants to trade with you at a fair price.

Also, DEXs are still relatively new, so there will be no supply and demand for the crypto assets you want to trade.

Transaction Latency

Transaction latency is also a limitation on DEXs. Since the orders are executed on-chain on the blockchain platform and need to wait for the confirmation of the nodes, it leads to the delay of the transaction order being executed.

Fee

Fees on DEXs are not always high but can be, especially when the network is overloaded and you are using an on-chain order book.

V. Why DEX can not replace CEX to dominate the market?

The DEX lacks flexibility compared to the prevailing centralized exchanges such as user support functions and UI (user interface) so it cannot attract a basic user base.

Some decentralized transactions require the user to be always online in order for an order to be listed and a new transaction to be executed.

Trading features such as margin trading, lending and stop loss are not yet present in the decentralized model, as most DEXs only allow currency trading. base currency with a given value.

Sometimes a transaction will be degraded by the network.

VI. How to earn & own (Project Token)?

• What does asset custody mean?

Asset custody refers to the account holders on the exchange.

Example: When you buy Bitcoin on Coinbase exchange, that BTC will show up in your Coinbase account. However, you don’t actually own and control that BTC yet. So you need to move that BTC out of Coinbase to another wallet address that you have full control over. Thus, if you still keep assets on Coinbase exchange and that exchange is hacked, it is considered done.

And DEXs were born to solve this problem. When trading on the platform, the DEX will keep all funds in the user’s private wallet. They can then manually send and confirm transactions from their personal wallets with the help of smart contracts.

• Should newbies use DEX or CEX?

If you are new to the market, use CEX to familiarize yourself with basic trading and know how to buy and sell cryptocurrencies, as well as how to secure your account.

After a period of experience and proficient use of CEX, you begin to gradually switch to using and experimenting with large decentralized exchanges.

• Does the DEX exchange integrate with hardware wallets?

Many decentralized exchanges offer seamless integration with today’s popular hardware wallets such as Ledger Nano S or Trezor to enhance the security of transactions. Users can send assets directly from their hardware wallets to smart contracts on the DEX.

• Is DEX really safe?

In fact, no matter how good the security is, with the “super” hacking skills of today’s hackers, you can’t confirm 100% of the DEX floor is not hacked. However, surely DEX will be much safer than CEX exchanges – where countless hackers in the world gather.

Conclusion

You must have gained some understanding of the decentralized exchange through the aforementioned article. Those who desire the highest level of asset security should choose this option. DEXs will soon be able to compete head-to-head with centralized exchanges without suffering any losses. Hopefully, the information above will provide you new insight into the world of virtual currencies.

The above is Meta Lion’s comment on the  DEX which is our personal opinion, this is not investment advice at all. Investors should be responsible for their own decisions.