The concept of a decentralized exchange is based on the foundation of blockchain technology. Similar to a blockchain network, it directly connects buyers and sellers without any intermediaries in-between. A DEX is developed on a blockchain network like Ethereum. They are a decentralized application that runs with the blockchain-enabled smart contracts.
In a DEX system, a buyer and seller can directly trade crypto with each other. There are no centralized entities to monitor or process transactions. Instead, records are stored on a distributed public ledger. A Decentralized Exchange functions in a distributed environment with orders as well as data stored and managed on a peer to peer network.
Since there is no central authority, the control of the user’s funds remains in their hands. But if a user loses access to their private keys, there are no methods to retrieve the funds. Also, because the funds are not stored on a single exchange, there is no central point of failure. This minimizes the risk of attacks and hacks.
Not all DEXs are included
These are the key features of a decentralized exchange.
Operations – The DEX ecosystem runs on a peer to peer and decentralized network. The DEX structure allows two parties to conduct a direct transaction. Since the network is decentralized, there are no entities that maintain, operate, or process transactions.
Requirements – Trading on a DEX exchange does not require a user to deal with verification or provide KYC/ AML documents. A trader can simply transact with another entity using DEX firmware.
Security – A DEX ecosystem is relatively more secure as users’ funds are not stored on their platform. However, at the same time, there are no security protocols like 2FA or email-authentication in place. In case someone has access to your private keys, they can access your funds as well.
Volume – As DEX firmware is relatively new with few features to offer, the trading volume on the exchange is low. This subsequently results in lower liquidity in the DEX ecosystem.