Note: This is a lesson in my Free Decentralized Exchange Course
Blockchains and distributed (decentralized) computer networks have sparked a revolution in the way assets are traded. Centralized exchange websites have been the only platforms for trading until recently. Cryptocurrencies and their underlying tech have emerged to allow peer to peer and peer to pool exchanges.
These are called decentralized exchanges (DEXs) and are exploding in number. DEXs are my main niche that I study for this blog, so I’m obsessed. It seems like every blockchain in existence is building a DEX right now.
Their main focus is to allow investments in new projects and coins that come out for that chain. Also, there are dozens of efforts to “tokenize” traditional assets such as stocks, ETFs, commodities, etc. The DEX trading revolution is ON, no doubt about it. Here are the features of centralized vs. decentralized exchanges.
Centralized Exchange Features
- Highly regulated
- Funds are stored in central databases for their sites.
- Matches buyers and sellers with an order book
- Users sign up and KYC
- Liquidity is provided by the exchanges’ databases.
Decentralized Exchange Features
- Tough to regulate
- The original DEXs were peer to peer.
- No centralized authority or arbiter.
- Users plug in and trade with their anonymous wallets.
- Liquidity is provided by the smart contract programs that live on blockchains and can’t be changed.
- Trades are made against the liquidity pool provided by users that earn a reward
- Most trades are cryptocurrency swaps as of now (Mar, ’22).
Decentralized exchanges are now exploding in number on top of various blockchains. They are improving on Ethereum’s Uniswap. In fact, most are clones of the Uniswap code! Their fees are getting lower. Their speed is improving and they are becoming more scalable.
It seems there is a turning point in DEX technology as we careen through 2022. Blockchains are connecting to allow various coins to be swapped.
The future is coming on fast where traditional assets will be traded with crypto assets very quickly with cheap fees. Centralized exchanges will become totally obsolete in the coming years.
Also, point of sale will be any combo of assets into any other combo of assets in a type of trade too. That’s where I see blockchain and crypto technology headed. DEXs are a wild thing to study. I highly suggest it!