WHAT IS DECENTRALIZATION ?
The transfer of control of an activity or organization to several local offices or authorities rather than one single one.
While EXCHANGE simply means an act of giving one thing and receiving another (especially of the same kind) in return, it could be exchange of money properties etc it has to be something equal and equivalent to what you want to Exchange, like the changing of money to its equivalent in the currency of another country.
WHAT IS DECENTRALIZED EXCHANGE?
Decentralized Exchange (DEXs)- is simply another type of exchange that allows peer-to-peer transactions directly from your digital wallet without going through an intermediary. It is a peer-to-peer marketplace where transactions occur directly between crypto traders. DEXs fulfill one of crypto’s core possibilities: fostering financial transactions that aren’t officiated by banks, brokers, or any other third party. DEXs — utilize the Ethereum blockchain and are part of the growing suite of decentralized finance (DeFi) tools, which make a huge range of financial services available directly from a compatible crypto wallet.
EXAMPLES OF DEXs
•Uniswap
•PancakeSwap
•dYdX
•Kyber
WHAT ARE THE BENEFITS OF DEXs
•Decentralized exchange solves problem of Security -it prevents hacking and theft.
•Decentralized exchange allows you to manage your finance without a middleman.
•Users of decentralized exchanges do not need to transfer their assets to a third party. Therefore, there is no risk of a company or organization being hacked, and users are assured of greater safety from hacking, failure, fraud, or theft.
•It Solves problem of government Policies , It is free from government regulations, financial requirements, and monitoring. Traders face each other on a peer-to-peer basis.
•Low Transaction Cost- the absence of intermediary lowers transaction cost and there is no intermediary to confirm transactions. The absence of intermediaries lowers transaction costs and increases the speed of executing trades. Besides, users have total access to their private keys and, thus, they self-custody their assets. This reduces the chances of hacking.
•Decentralized exchange offer a broader basket of tokens that you rarely find in Centralized exchange.
HOW DOES DEXs WORK
These is a per-to-per market place where Cryptocurrency traders make transaction directly without handing over management of their funds a custodian or to a third party which means users can control their wallet private keys
A private key is an advanced encryption that enables users to access their cryptocurrencies. Users can immediately access their crypto balances after logging into the DEX with their private key.
They will not be required to submit any personal information such as names and addresses which are great for individuals that like privacy alot. This transaction are facilitated through use of self-Executing agreement written in Code called Smart Contract.
A Smart Contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code.
Traders guide their funds and are responsible for their lose, if the make mistake such as losing their private keys or sending funds to the wrong addresses . Customers that deposited Funds or assets are issued an IOU (I Owe you ) via decentralized exchange portal. an IOU is a blockchain-based token that has the same value as the underlying asset.
Popular decentralized exchange have been built on top of leading blockchains that supports smart contract. They are built on top of layer-one protocols, meaning they are built directly on the blockchain. The most popular DEXs are built on the Ethereum block chain.
How DEXs Works
As Decentralized exchange are built on top of blockchain network that support smart Contract every trade incurs a transaction fee along with the trading fee. In this, traders interact with smart Contract on the blockchain to use DEXs.
TYPES OF DECENTRALIZED EXCHANGE There are three main types of decentralized exchange :
- Automated market makers (AMM)
- Oder books DEX (Two types of Order books DEX are, On-chain order books and off-chain order books)
- DEX Aggregators
HOW TO USE DECENTRALIZED EXCHANGE
The process do not involve a signup process, You don’t need an email address to interact with the platforms. Rather traders will need wallet compatible with smart Contract on the Exchange’s network . To use DEXs the first thing is to decide which network provider you will use because each trade will incur a transaction fee . Choose a wallet that is compatible with your selected network and then fund it with its native token.
when a token is an integral part of the operation of the network protocol it is issued on, and they are created at the network's genesis. Ether (ETH) is the native token used by the Ethereum blockchain and network as a payment system for verifying transactions. So a native token means crypto asset that can be used natively to perform a service to a protocol in exchange for a reward.
Wallet Extension gives users access to their funds directly in their browsers to make it easy to interact with Decentralized Applications like DEXs. This are installed and allows user to import an existing wallet through speed phase, private keys or create a new wallet.
These wallets allows traders to use Decentralized finance protocols as they come with built-in browsers ready to interact with smart Contract networks. It is allowed to synchronize wallet between devices.
When a users must have chosen their wallet or picked a wallet the next thing to do is to fund the wallet with tokens used to pay for transaction fees on the chosen network. The token are bought on centralized exchange and are easily identifiable through ticker symbol they use .
A ticker symbol is the short combination of letters that is used to represent an asset, stock, or cryptocurrency token on various exchanges and DeFi solutions. Example of ticker Symbols, Like BTC for Bitcoin, ETH for Ethereum.
After buying the token on a centralized exchange Users have to withdraw the token to their wallet where they can have full control of it.
ADVANTAGES AND DISADVANTAGES OF DEXs
ADVANTAGES
- Reduced Security risks
- Anonymity
- Reduced counterparty risk
- Token availability
DISADVANTAGES
- Smart Contract Vulnerability
- Unvetted token listings
- Specific knowledge is required
To avoid funding the wrong network users must withdraw their funds to the correct network. with funded wallet, users can connect their wallet through pop-up prompt or through “Connect wallet” Button .