Tso if you are new to the world of cryptocurrencies y blockchain, or conversely, you already have knowledge about it, it is very likely that you have heard about exchanges. These are digital exchange houses where you can exchange cryptocurrencies and tokens for fiat money or for other cryptocurrencies. And where the value of cryptocurrencies is determined by the supply and demand of crypto assets in the market.
However What are decentralized exchanges (DEX)? There is a lot of talk about this type of exchange today, especially due to the level of security they offer the user, and even anonymity.
Decentralized exchanges, also known as DEX, They are digital platforms that function like traditional exchanges. But, unlike traditional exchanges, a service operates in the center of the service. Smart contract. This eliminates intermediaries to a large extent, making them more secure and transparent. Simply put, a decentralized exchange, or DEX, is a cryptocurrency exchange operated by smart contracts.
This means that trust and the management of funds do not fall on a central figure. On the contrary, the users of the exchange maintain control of their assets at all times. A feature that adds a high level of security, privacy and even anonymity, when operating in this type of exchange houses.
But how do we get from traditional exchanges or decentralized exchanges? What other advantages do DEX offer us? Well, let's take a closer look at the history behind these decentralized exchanges.
Origin of decentralized exchanges
Cryptocurrency exchanges have evolved a lot since the creation of the first of these platforms. Initially, exchanges like Mt Gox. they followed a centralized management and interaction model. That is, the exchange controlled the funds that we have in it. And to perform operations it was necessary to log in. This obviously ends with the decentralization of cryptocurrencies and generates serious security problems, as the Mt Gox hack showed us.
To face this and other problems presented by centralized exchanges, decentralized exchanges were born. Of the first platforms of this type were OmiseGo and BitShares that began to be developed in 2013. Each of them with different operations and capabilities, but with the same objective: to start the revolution of decentralized exchanges. But getting to that point has required an evolution in the time that we will describe below.
Types of exchanges
Now the evolution of exchanges has created three types of exchanges or generations, well differentiated. These are:
- First generation: Despite being a relatively new concept, decentralized exchanges already have differentiated versions. On the one hand we have traditional exchanges, these are centralized, you must send your cryptocurrencies losing absolute control of them and blindly trusting the good work of the platform. We can call these centralized Exchanges, but also first generation.
- Second generation: On the other hand we find the most basic decentralized exchanges, the second generation ones. These change the central piece for a smart contract, which is in charge of making the exchanges. As smart contract as it is, everyone can see how it works. However in these smart contracts you must send your cryptocurrencies, losing possession over them for the time you want to make the exchanges.
- Third generation: A new generation of decentralized exchanges improve this last point, allowing you to not need to send your cryptocurrencies anywhere, despite being able to open exchange orders with them. We call them third generation exchanges. In the same way they act through a Smart contract at the epicenter of the tool, but it allows you to keep cryptocurrencies in your wallet at all times, so if those tokens give you dividends, or options to vote in a DAO, you can do it until the last millisecond of the exchange.
Blockchain technologies for DEX
Although Ethereum It is the most used platform for this type of development, due to the large number of projects (Tokens y DApps) that is being developed on it, there are other blockchain that also allow this, including Bitcoin through the project Counterparty. Some other blockchains that allow creating decentralized trading platforms are: Stellar, Komodo, Waves, BitShares, NEO or burning among others.
Everyone can see in a transparent way how the service works, how it will act in any situation and see in real time what is happening within it, without manipulation.
Protection and security
Every year hundreds of millions of euros are stolen from centralized exchanges. In 2018 alone, more than € 1000 billion was stolen from centralized exchanges.
In DEX smart contracts can be implemented as a protection against scams and fraud. Thus, when establishing a contract with certain conditions to be fulfilled, the parties involved in the exchange must obey these conditions for the operation to be executed. In case of breach of any or all the conditions, the contract expires and is not executed. Best of all, these contracts, once scheduled, run automatically and decentralized.
Furthermore, DEXs work through a network of computers interconnected with each other, in much the same way as a blockchain network. So they have high protection against hacks or computer attacks that threaten the integrity of user funds.
However, decentralized exchanges (especially second-generation exchanges) can also be robbed, as all funds are held by a smart contract that may contain failures, such as the famous billionaire robbery The DAO.
A high degree of anonymity is another advantage they can offer. This is because a decentralized exchange (DEX) only uses addresses to carry out transactions and exchanges. Without requiring users to supply data and personal information.
Another advantage of decentralized exchanges is their robustness and solidity. The probability of a DEX system crash is almost nil; so users will not have to worry about this problem. This is because DEXs do not operate with a single server, as is the case with centralized exchanges.
Disadvantages or disadvantages of DEX
At first if you don't have the knowledge, the DEX platform may seem confusing and difficult to operate. So it is almost always necessary the guidance or instruction of an expert user to understand them and start operating on them.
A decentralized exchange (DEX) does not serve to make exchanges between cryptocurrencies of different blockchain. Since Ethereum is the network with the most tokens, the most famous decentralized exchanges are from this network. But for example you can't exchange Bitcoin for Ethereum, only Ethereum tokens for other Ethereum tokens.
Types of orders
The types of orders that can be placed on a decentralized exchange are very limited, being able to place only Limit and Market type orders.
Since exchange operations take place within the same blockchain in DEX, their process is much slower than in a centralized exchange. So a decentralized exchange cannot manage high frequency.
The most important thing about a trading platform is liquidity, which in turn generates low spreads. A decentralized exchange (DEX), due to its lack of manipulation capacity, usually has little liquidity, in turn generating little traction that turns back to little liquidity and high spreads. Something that drives away any user.