Understanding How Decentralized Exchanges Work

Decentralized exchanges are a key component of any blockchain ecosystem and a powerful use case for cryptocurrency. Decentralized exchanges allow users to trade directly with each other, cutting out the need for centralized brokers or intermediaries. Unlike typical crypto exchanges that collect personal information and provide accounts with balances in single currencies, decentralized exchanges let users transact directly with other users, without much regulation.

This post will be a simple introduction to the concept of decentralized exchanges (DEXs), and a basic tutorial on how they work. Decentralized exchanges are not new. Cryptocurrency pioneer Bitcoin itself was initially intended to be used as an exchange medium but failed due to its slower network and speed of processing transactions.

The Rise of Decentralized Exchanges

Although centralized exchanges are more prevalent and easier to use, there have also been incidents where they get hacked and user’s fund gets stolen. In one of the latest hacking incidents in May 2017, a Japanese crypto exchange Coincheck lost about $530 million worth of NEM, which is considered to be one of the biggest cryptocurrency heists.

VeChain which is a Blockchain-based business network has made the decision to move away from ERC-20 tokens and build its own independent Blockchain. This is one reason why VeChian decided to join forces with the Krypto Mobile Platform, BitSe.

A mobile decentralized exchange that allows users to trade cryptocurrency from their wallets while on the move. This brings a whole lot of convenience as you can assess thebitcoinsystem UK while on the go.  When on a mobile device, BitSe will work in conjunction with VeChain to offer users a two-way cryptocurrency conversion service. When you trade through the App, your coins are always stored locally; this ensures that they’re never held for you by anyone but yourself.

Concerns Safety of Decentralized Exchanges

While decentralized exchanges seem to be favorable in so many aspects, there are also some concerns about the systems. It is important to understand such concerns before making a decision. One of the major concerns is safety. Decentralized exchanges remove the human factor and, therefore, make it difficult to track down those responsible for scams or theft. This means that if some of your coins are stolen by a hacker or an individual, you’re not likely to get them back.

As highlighted in a study conducted shows that it is very easy to be hacked if you are not careful. There is no doubt that centralized exchanges come with higher risk, but there have been instances of decentralized exchange hacks as well. It seems to be part of the game even when it comes to decentralized systems. Another concern users have about decentralization is related to inflation and increasing coin supply. With the market being volatile, the price of a coin can increase to 10x or even 100x in just a few years.

If you look at the top tokens by market cap today, there is a high probability that several will be much more valuable in the future, and also some of them would be completely worthless. So if most of your coins are held on exchange, it ends up being a serious loss for you.

Decentralized Exchanges in Crypto

Decentralization can also help to mitigate network congestion and off-chain forking. In centralized exchanges, there is one node where all transactions get placed which in turn causes transaction delays during periods of high traffic. Decentralized exchanges do not suffer such problem since all the trades are being dealt on the blockchain through peer-to-peer connections.

Final Words

Centralized exchanges can be hacked and can even lose your coins, which has happened in the past. They also have a lot of power to manipulate the market since they control the users’ funds and traders have no option but to depend on them. Decentralized exchanges are safer and better for crypto trading and investments.

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