If you’ve been involved with blockchain technology and cryptocurrencies, you’ve probably already heard about crypto exchanges such as Binance, Poloniex, Bittrex, and Coinbase.
Now, there is a new generation of exchanges emerging that are gaining traction and attention from the crypto community.
In this piece, we explain what decentralized exchanges are, why and how they are better than current solutions, and what problems they currently face.Key Takeaways Decentralized exchanges work as fully autonomous, decentralized applications (DApps), which allow traders to transact without giving control over their money to a trusted central authority, as is the case with their traditional centralized counterparts. The main benefits are increased privacy, security, and control over the funds. Drawbacks include low liquidity as well as reduced usability and speed. What is a decentralized exchange?
A decentralized exchange is a trading pair matching system that allows people to place orders and trade cryptocurrencies without relying on an intermediary institution to manage the ledger and hold customers’ funds. Instead, trades occur directly between users (peer to peer) through an automated process. This decentralized application (DApp) utilizes blockchain technology to keep the order books and facilitates trades using smart contracts.
This system is in contrast with the current dominant centralized model in which users deposit their funds and the exchange issues an IOU that can be freely traded on the platform. When orders a withdraw of his funds, these IOU’s are converted back into cryptocurrency and sent to their owner.Advantages of decentralized exchanges
It is somewhat paradox to rely on centralized entities to trade cryptocurrencies when the entire industry is built upon the idea of disintermediating middlemen. Apart from the ideological reason, decentralized exchanges also feature conc...