Normally, the users need to exchange their crypto assets to get the services in different scopes, and it is essential to exchange assets in between different cryptocurrencies in order to experience different features of those cryptocurrencies. The continuation of this exchange cycle is the origin of creating a better virtual exchange market. Have you been aware of the Bitfinex Bitcoin hacking? Bitfinex was the world’s leading crypto assets exchange in 2012 and in 2016 it was hacked causing around a $60m loss for the users. It is important to find out how to avoid these kinds of security threats in digital currency exchanges. According to the current considerations, decentralized exchanges are providing better security to the domain. This context is focused on what are decentralized exchanges, the advantages, and the downsides.
What does a decentralized exchange mean?
Being decentralized ensures security protection in almost every parameter that includes cryptocurrency and virtual currency. Many cryptocurrencies are operated within the decentralized network chains such as Bitcoin, Ether, and Monero. In general, ether and Monero hold some special features and tools that bitcoin doesn’t offer. While exchanging the crypto assets in between these currencies through a third party would cause security risks as mentioned above. Decentralized exchanges (DEXes) are an exchange market that does not depend on a third-party exchanger. The trades in the peer-to-peer services are directly funded due to the automated environment of DEXes. These kinds of DEXes are created by establishing proxy tokens/assets or through a multi-signature escrow system. In the case of DEXes, a set of fiats or cryptocurrencies are known as a proxy token while a set of shares can be identified as assets and multi-signature escrow is a digital signature schema where both the users can sign in a single digital document to maintain the trust between them. As same in most of the cryptocurrency applications, DEXes is built around a smart contract.
Unlike centralized networks, decentralized networks perform in a different mechanism. Once when the user deposited their money to the exchange the system itself issues an IOU. IOU is a representing token issued from the blockchain which is similar to the value of the user’s asset. In return, when the user needs to withdraw the money, IOUs are re-transferred into cryptocurrencies.
Advantages of DEXes
Ensuring security: This can be considered as the leading advantage of DEXes. Since there is no necessity for a mediator, it is not required to trust the middle-man. So, your wallet can be secured from unauthorized parties. On the other hand, though the system is hacked the cryptocurrencies cannot be stolen because of the IOU conversion.
Protection of private details: Unlike the bank transfers, involving DEXes does not disclose personal details to anyone.
Less probability of inactivation: DEXes holds a distributed hosting environment between every entity. Since the entire network is updating with no time delay, the probability of server downtime will be very less.
Downsides of DEXes
The inability of providing Advanced features: In the present time, most of the DEXes are not able to provide trading features such as margin trading, stop loss, and lending. DEXes are still allowing only for basic exchanges which are predetermined. Moreover, the users are requested to be online throughout the exchange, and users are asked to confirm if the payments are received. All the blockchain and digital currency subscribers are waiting to experience a DEXes that is free of these downsides.