Top FAQs about Decentralised Exchanges
What is a DEX?
DEX is short for decentralised exchange. It is essentially a platform where people can trade cryptocurrencies without an intermediary managing the ledger or controlling user funds.
How is a DEX different from a CEX?
The vast majority of cryptocurrency trading currently still takes place on centralised exchanges (CEXs). On these platforms traders are serviced by central intermediaries.
Whereas CEXs such as Coinbase or Kraken require a great deal of personal information and manage your accounts, making your funds vulnerable to theft, DEXs allow for direct, hassle-free trading, with users responsible for their own funds’ safe-keeping.
Why are DEXs important?
DEXs fulfil the ideological purpose of crypto-economics which is to increase financial freedom by decreasing dependency through decentralisation.
Also, with approximately one in sixteen Bitcoins having been stolen and an estimated third of millennials invested in cryptocurrencies, decentralising the way we trade is incredibly important to optimise safety.
What are the core features of a DEX?
In general terms, crypto exchanges have three essential functions: fund management, order books, crypto transactions.
For an exchange to be truly decentralised, each of these functions must operate in a decentralised manner:
- Users’ funds are not entrusted to a third party. Users are their funds’ custodians and therefore keep their assets in their own hot and cold wallets.
- Orders must be broadcasted directly from one trader to another, with their apps compiling an order book, without any dependence on some kind of central order book service.
- With users’ apps communicating to set up the trading process, orders are matched directly between traders which are then broadcasted over the inter-chain network and settled directly, peer-to-peer.
What are some of the main benefits of DEXs?
Apart from improving safety by keeping users in control of their own funds and being much less vulnerable to hacks, DEXs offer a high degree of anonymity requiring much less personal information than CEXs.
In addition, on DEXs there is no single point of failure. Any rollouts or updates occur on a node-by-node basis, meaning that even if individual nodes go down due to maintenance or for other reasons, the remaining nodes keep the DEX live.
What are some of the drawbacks of DEXs?
As DEXs are more complicated than CEXs, relatively new and slower to develop, there are some drawbacks that still need to be resolved.
Not all DEXs are equally user-friendly. While creating an account on a CEX is relatively straightforward, DEXs often require connecting to a dApp or installing a standalone DEX client. Also, while CEXs generally offer advanced tools such as margin trading, for now most DEXs are restricted to buying and selling only.
Because DEXs represent only a tiny portion of the total crypto-market’s trading volume, liquidity is generally too low for high-volume trading. Currently, DEXs are better suited for low-volume trading of popular coins.
Which cryptocurrencies can be traded on a DEX?
It is helpful to bear in mind that there are over 1500 different cryptocurrencies on the market and different DEXs make different selections as to which cryptocurrencies can be traded. This selection is not determined, but definitely influenced by the specific blockchain upon which the DEX is built.
For example, EtherDelta enables trade of over 240 coins, all of which are compliant with Ethereum token standard (ERC20).
BitShares, besides enabling trade in Bitcoin or Ethereum, focusses on trading BitAssets, which are stablecoins pegged to a real-life assets such as BitUSD, BitEUR, BitGold, etc.
How best to optimise security when trading on a DEX?
When it comes to cryptocurrencies it is good to consider three layers where security is at stake: coins and tokens, exchanges, and wallets.
When selecting coins to trade with, make sure that they are in no way centralised and their protocol does not allow any authority to compromise distributed consensus.
DEXs are safer than CEXs but bear in mind that every exchange is situated on a spectrum with some DEXs more decentralised than others.
When trading on a DEX, be advised to keep a limited amount (20%) in hot wallets and the rest secured in cold wallets. Also, be sure to change passwords frequently, preferably using a two-factor authentication method (2FA).
Extra measures include dedicating a device, such as a smartphone or PC, to the sole use of trading cryptocurrencies; avoiding public WI-FI while trading; and having devices encrypted (VeraCrypt, FileCrypt).
As a rule of thumb: at each layer, go with the principle of decentralisation.
What are some of the most promising up-and-coming DEXs?
DEXs are a relatively new phenomenon compared to their centralised counterparts. The market for DEXs is developing and growing at a rapid pace.
Some up-and-coming DEXs include 0xProject, which is actually a platform for DEXs such as Radar Relay and EthFinex; EtherDelta, one of the most popular DEXs around; Kyber Network; Waves; and our very own SparkDex, which is purpose built for pegged cryptocurrencies.
For more a more in-depth discussion about these up-and-coming DEXs read our dedicated article here.