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What is a decentralized exchange? | Coin Center

Public blockchains have the potential to act as a potent equalizing force for the world by democratizing access to financial services in the same way that the internet has democratized access to information. Decentralized exchange technology will play a key role in accelerating our transition to a financial system where people can transact directly, on a peer-to-peer basis, with no middlemen required.

To understand how decentralized exchanges work we must first understand what blockchains are and how they function at a conceptual level. Blockchain explainers tend to emphasize their elegant inner-workings rather than the practical details that make them useful; let's review some of the practical details first.

Blockchains A blockchain is a peer-to-peer (“p2p”) network where each node maintains an identical copy of a transaction ledger by synchronizing with other nodes on a regular cadence. A p2p network is just a bunch of computers — called nodes — running software that allows them to find and communicate with each other. The ledger is just a list of past transactions (“Alice sent Bob X units of asset Y at time Z”) that may be used to keep track of everyone's respective balances of the blockchain's underlying cryptocurrency.

The ledger is the sole reason for why a blockchain exists, everything that follows — all of the computer science stuff — is just there to make sure every node has an identical and up-to-date copy of that ledger.

In practice, blockchain networks can reach tremendous scale. Today, the Bitcoin network consists of approximately 10,000 nodes spread out across the globe. One can spin up a Bitcoin node (latest version here) and plug into the network to get a reasonably accurate view of the global distribution of nodes.

Figure 1: a map showing the global distribution of 9,659 reachable Bitcoin nodes over 24 hours (August 28, 2018). Centralized cryptocurrency exchanges

Cryptocurrency exchanges are for-profit busi...

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