What is a Decentralized Exchange?

[dragononcrypto]

From CryptoCompare:



Bitcoin, the first blockchain-based cryptocurrency, was created as a peer to peer payment system that allows its users to transfer value with no central authority or third party involved. Since a network of distributed and mostly anonymous miners are all in charge of processing the transactions, we are ensured that problems like censorship, fraud, and others are not possible.

The automated issuance mechanism of bitcoin through mining also seeks to remove the control of money printing from privately owned banks that lend said money to governments at an interest, creating the debt-based economy that led to the crash in 2008, which in turn led to the creation of Bitcoin. However, we have become somewhat detached from the primary goal of Bitcoin, to return the control of money to its owners, and we entrust our Bitcoin with third party services daily. The most popular of these services being exchanges.

Centralized exchanges are easy to use, easy to access and they provide advanced trading functionalities like margin trading and others. However, they also represent a security risk for your funds. While some exchanges are better guarded than others, hacks are not an uncommon event in the cryptocurrency scene, and some like the recent Bitfinex hack have led thousands of users losing their savings. Some exchanges are simply incompetent or malicious, practicing fractional reserve systems that can either lead to a voluntary elimination of the excess instruments (Mt. Gox hack from June 2011), bankruptcy (the demise of mybitcoin) or a new investor bailout. The Mt. Gox case had such an impact on the Bitcoin community that it led to the term "Getting Goxed".

Nevertheless, we need to exchange our currencies. There are certain items and services that we cannot buy with Bitcoin (yet) and in order to acquire Bitcoin or cryptocurrencies, most people have to exchange it for a national currency. Furthermore, some cryptocurrencies like Ether or Bitshares have special features or tools that are not present in Bitcoin. So how can we exchange our coins without entrusting them to a third party service? The answer lies with decentralized exchanges.

What is a Decentralized Exchange

A decentralized exchange is an exchange market that does not rely on a third party service to hold the customer's funds. Instead, trades occur directly between users (peer to peer) through an automated process. This system can be achieved by creating proxy tokens (crypto assets that represent a certain fiat or crypto currency) or assets (that can represent shares in a company for example) or through a decentralized multi-signature escrow system, among other solutions that are currently being developed.

This system contrasts with the current centralized model in which users deposit their funds and the exchange issues an IOU that can be freely traded on the platform. When a user asks to withdraw his funds, these are converted back into the cryptocurrency they represent and sent to their owner.

Benefits

The most obvious benefit to using a decentralized exchange over a centralized one is their "trustless" nature. You are not required to trust the security or honesty of the exchange since the funds are held by you in your personal wallet and not by a third party.

Another advantage to the decentralized model is the privacy it provides. Users are not required to disclose their personal details to anyone, except if the exchange method involves bank transfers, in which case your identity is revealed only to the person that is selling or buying from you.

Furthermore, the hosting of decentralized exchanges is distributed through nodes meaning that there is no risk of server downtime.

Downsides

Of course, there is always a downside and this case is no exception. Centralized exchanges are extremely popular for many reasons.

Some decentralized exchanges like Bitsquare require users to be online in order for an order to be listed and for the trade to take place, requiring users to perform certain actions like signaling that a payment was received.

Trading features like margin trading, lending and stop loss are currently not available in the decentralized model as they only allow the basic exchange of currency for a predetermined value.

Decentralized Exchanges

While there is still a long way to go in order to build fully functional and convenient decentralized exchanges, there are several projects that have brought us the basic functions and an alternative way to trade currencies while keeping our funds safe from hacks, inside thefts and faulty business models.

Bitsquare: Bitsquare is a decentralized open-source exchange that allows users to buy and sell Bitcoin for cryptocurrencies and national currencies without the need to entrust funds to third-party or middleman, meaning that the transactions occur directly between the buyer and seller. Bitsquare relies on a decentralized multi-signature escrow system to ensure that all trades are carried out honestly.

Click here to see Bitsquare reviews and features on CryptoCompare. We are also preparing a "How to use Bitsquare" guide that will be released soon!

Bitshares & Openledger: Bitshares is a crypto platform with its own native currency, Bitshares (BTS). Using the Bitshares platform, users can trade BTS, Market Pegged Assets (a crypto asset pegged to another currency or commodity that always has 100% or more of its value backed by the BitShares core currency, to which they can be converted at any time) and User Issued Assets (assets that can be issued by anyone to represent shares, commodities, currencies and so on). Openledger is the Web-based version of Bitshares, running on the same underlying blockchain.

NXT: Nxt is a crypto platform (one of the first crypto 2.0 projects) that allows users to issue and trade assets. These assets, however, can only be exchanged for the coin NXT and not for other cryptocurrencies. Asset-to-asset exchange is also not possible.

CounterParty DEX: CounterParty (XCP) is a meta-coin smart contract layer that embeds data into regular Bitcoin transactions. It allows anyone to issue assets or tokens inside of the Bitcoin blockchain. When trading assets for other assets, the Counterparty protocol acts as a decentralized escrow service that holds the funds until the orders are matched. When trading an asset for Bitcoin, the asset is held in escrow and the other user must make a manual bitcoin payment using the Counterparty wallet.

In Development

New decentralized exchanges are currently being developed to provide us with the advanced features and ease of use that we so desire. Among these are the Waves Asset Exchange, one that will allow users to trade assets (including asset-to-asset exchange), fiat tokens, and cryptocurrencies. The EasyDEX exchange will allow users to trade cryptocurrencies directly without resorting to proxy tokens, while the PAX (Pegged Asset Exchange), also being developed by the SuperNET and Komodo teams, allows users to exchange national currency assets with the privacy that zero-knowledge proofs provide.

Through the efforts made in the past and the ones being made now, we can see the overwhelming need for decentralized services that allow users to be in charge of their money.

[greta85]

Hey, what about the DEFX, the Malaysian exchange platform? Have you heard about it? What do you think about it? Recently, I learned that FuturoCoin will be introduced to it, hence my interest. I wonder what are the fees?

[Ozark]

Hey, what about the DEFX, the Malaysian exchange platform? Have you heard about it? What do you think about it? Recently, I learned that FuturoCoin will be introduced to it, hence my interest. I wonder what are the fees?

I think there's no such thing as DEFX... maybe what you mean is Dfx Exchange By Damansara Forex. However, it's not a cryptocurrency exchange but simply a currency exchange, https://en.yelp.my/biz/dfx-exchange-by-damansara-forex-kuala-lumpur 

[Borkinlp]

But when we use centralized exchanges like Binance, Bittrex or Poloniex, we actually jeopardize that fact. But, decentralized exchanges don't have big volumes and it's harder to use them. So at this moment I more use centralized. Very like Huobi Russia. Local exchnage for a Russian speaking people from Huobi Global. It's quite good.

[VirtualBtc]

Decentralized exchanges are those types of exchanges where third party never create positive or negative importance. It is directly communicate with customers to their products.

[Plnshah65]

Decentralized exchanges are those types of exchanges where third party never create positive or negative importance. It is directly communicate with customers to their products.

Yes, dex means the absence of 3rd parties. Dex is more usable, it has enough generation gap between user and 3rd parties.

[Altcoin1998$]

Centralised exchanges are presented by third parties but decentralized exchanges are absence of third parties presentation.

[cheekwit]

Great informational post dragoncrypto, thank you

[Pluto25]

My first decentralized exchange is forkdelta. what is your decentralized exchange ?

[Coin63@]

Decentralized exchange is those types of exchange which type fully decentralisation in nature and it's has no third parties. No excessive amounts of fees required in listing token in dex exchange. Forkdelta is my first used decentralized exchange.

[Altcoin1998$]

My first decentralized exchange is forkdelta. what is your decentralized exchange ?

Actually I beginner traders prefer to trade his bounties campaigns rewards in dex without any centralized exchange listed. I am also fun of forkdelta because when I was fresher then I started my trading on forkdelta decentralized exchange plafrorm with my private key.

[Shiftal]

A decentralized exchange is a trading platform that is not governed by any centralized entity or people. It works more or less like the blockchain, allowing users to trade directly with each other, without a middleman.

100% decentralized exchanges are usually not feasible, as creating an exchange that can manage itself and requires zero human interference is nearly impossible. This is why another term P2P exchange was coined. A P2P exchange works similar to a decentralized exchange, i.e. allow users to buy/sell cryptocurrencies directly with each other, but there is also a support team to deal with the disputes & issues arising out of the trading activities.

Shital, for instance, is a leading P2P crypto exchange that allows users to trade BTC and ETH in over 220 countries and with support to 70+ payment methods.

[Coin63@]

My first decentralized exchange is forkdelta. what is your decentralized exchange ?

When I got entry in crypto currency exchange then I don't know how to exchange. I didn't know about binance and then binance also unsupported by my country. So forkdelta is my former exchange . I always considered forkdelta as my teacher exchange.