DEXs are at the heart of DeFi and are used to facilitate asset exchange and liquidity flows across the ecosystem. For most users, the first lesson in DeFi is DEX. Have you at least used Uniswap (the largest DEX on the ETH chain)?
Meaning of DEX
DEX, the full name of Decentralized exchange, is a blockchain-based exchange that does not store user funds and personal data on servers, but only serves as an infrastructure to match buyers who wish to buy and sell digital assets and sellers. With the help of a matching engine, this transaction happens directly between participants (peer-to-peer).
Advantages of DEX
Unlike centralized exchanges, which store and control customers’ assets, decentralized exchanges do not control customers’ assets. Instead, assets are stored in a distributed fashion, usually done by users or the exchange software itself. This way, there is no single entity as the owner of all the cryptocurrencies on the exchange, and the risk of loss is much lower.
It has two main characteristics:
One is anonymity.
Using a centralized exchange only requires a public key. At the same time, the creators of some centralized exchanges claim that they only release open-source software and are not responsible for the community’s use of the software, thus avoiding KYC and AML issues.
The second is security.
However, every day hackers are trying to find loopholes in the centralized system through various methods. Since decentralized exchanges exist in computer networks, it becomes more difficult to attack decentralized exchanges. There is no single point of entry or point of failure. This makes decentralized exchanges more secure.
Disadvantages of DEX
1、 low liquidity and trading depth.
Decentralized exchanges are still not as popular as centralized exchanges. Therefore, they have smaller clients, trading volumes and liquidity
2. Lack of professional trading setup
Decentralized exchanges are less convenient for professional traders due to the lack of advanced trading options. Algorithmic trading and high-frequency trading are very difficult in a distributed environment.
3. Lack of ease of use
Using a DEX usually requires connecting to a DApp or even installing an offline DEX client. You may need to configure a separate node and stay online for a long time to complete the transaction.
The difference between DEX and centralized exchange
The differences between centralized trading platforms and DEXs are mainly reflected in the following aspects:
1、Asset control is different
On a centralized trading platform, user assets are controlled by the centralized trading platform. Users need to recharge their assets to the wallet of the trading platform. The asset custody function of the centralized trading platform is like a bank. The user deposits the money in the bank, and the bank gives the user an account to record the user’s funds. The bank has absolute control over the user’s funds.
In DEX, users’ assets are completely controlled by themselves. DEX does not provide fund custody services, so it is impossible to control and transfer users’ funds.
2、different financial risks
The wallet of the centralized trading platform stores the funds of all users. Due to the huge amount of funds, it is easy to be attacked by hackers. It is not uncommon for them to insist on self-theft and even run away from the trading platform.
Compared with centralized trading platforms, the security risks come from hacker attacks and platform running away. In the event of a problem, almost all users will suffer losses; DEX users’ asset risk mainly comes from the user’s improper management of wallet private keys, and a user’s private key Leakage will not affect the asset security of other users. Assets between users are completely isolated.
3、Transparency of transactions varies
Transactions between users of the centralized trading platform are recorded by the trading platform, and the transaction information is only recorded on the internal ledger of the trading platform, not on the non-tamperable blockchain, so the transactions on the centralized trading platform are also It is called off-chain transaction (Off-Chain), and the transparency of its transaction records is relatively low. If the trading platform wants to do evil, the cost of tampering with transaction records is very low.
In DEX, transactions between users are completed on the blockchain, and their transactions will be packaged by miners and broadcast on the blockchain, so DEX transactions are also called on-chain transactions (On-Chain). On-chain transaction information means that transaction information can be publicly queried on the blockchain and cannot be tampered with, so DEX transaction information is more secure and transparent.
4、Different trading experience
On the centralized trading platform, since the transaction data is not on the chain, as long as there is a matching counterparty order, the transaction speed is extremely fast. At the same time, the operation steps of the centralized trading platform are simple, the use threshold is low, and it can provide a wealth of trading pairs, so more users will choose the centralized trading platform, and more users will have better trading depth, which further promotes centralized trading. The transaction speed of the platform order.
Because the transaction data needs to be uploaded to the chain, the transaction confirmation needs to wait for miners to package and broadcast, so the transaction speed is slow. The operation steps of DEX are relatively complicated, and the threshold for use is higher. When it comes to transactions of different blockchain assets, such as Bitcoin and Ethereum transactions, more complex cross-chain technology is required, which many DEX trading platforms cannot achieve, so there are fewer transactions supported than centralized trading platforms.