Main Features of DEX

Humans are gradually descending to use cryptocurrencies and digital assets and are discovering new zones of their application. However, everyone has their objectives to acquire cryptocurrencies; some want to use them as a means of payment whereas others consider them as an investment tool, a few think of it as a method to protect against inflation and other risks which were associated with the traditional financial infrastructures. 

Irrespective of the purpose of owning a cryptocurrency, the very first step for majority of the digital asset owners is to purchase coins. At this point, there are so many methods to locate a counterparty, but major transactions are carried out on specialized exchanges. Moreover, the use of crypto assets without the presence of exchanges is quite a challenge. 

How Do Cryptocurrency Exchanges Work

The first cryptocurrency exchanges were created as platforms for buying, selling and exchanging digital assets for other or fiat currencies. Modern trading platforms are already much more than a place where you can quickly exchange BNB to ETH at the price you need. In addition to trading coins, many platforms provide wallet services, staking, crypto lending and many other opportunities for active and passive income.

Types of Cryptocurrency Exchanges

Trading platforms can be classified in different ways, depending on the parameter that is taken as the basis for the classification. These may be some specific services, functions, geographic locations, etc. But perhaps the most important criterion is the way the platform is managed.

According to this criterion, there are three types of trading platforms:

• Centralized (CEX).
• Decentralized (DEX)
• Hybrid.

CEX

Functionally, such platforms are very similar to traditional currency or stock exchanges. However, the key feature of such services is the ownership structure. The platform is owned by a specific person or a small group of persons who control it and charge customers for services. On CEX it is possible not only to track the SOL to BNB exchange rate but also to exchange coins from different blockchains directly or indirectly using stablecoins. Among the prominent representatives of this group of platforms are Binance, Kraken, BitMEX, and Huobi.

DEX

Talking about Decentralized platforms are based on blockchains, because their work is entirely based on smart contracts, and decisions are based on further project development decisions made by the users themselves based on the votes they manage to acquire. For accessing the functionality of such types of platforms, a user has to register an account and have a crypto wallet connected to it. 

Although DEXs are built on the same principle and with the same purpose, technical solutions for organizing an automated environment for trading digital assets differ in detail. These differences allow users to choose the DEX that best suits their needs.

From the point of view of features of functionality and pricing, three main groups of DEX can be distinguished:

• Automated market makers (AMM). Unlike classic trading platforms, AMM works without an order book. The exchange rate is set by special algorithms in real time.
• DEX with the on-chain order book. Applications for each of the available assets are fixed in the order book, and the activity of market participants forms the current exchange rate. Information from the order book is entered into the blockchain, while the assets remain off-chain.
• DEX with the off-chain order book. This approach often implies the rejection of the use of the blockchain and transaction processing is traditionally centralized. The deal is first recorded in the order book, and then on-chain calculations are performed in the system.

In addition to DEX itself, there are already aggregators on the market. Such systems collect data from trading platforms in real time and save traders time.

DEX: Pros and Cons

Like any other innovation, DEX attracts the attention of both fans and opponents. Fans believe that the future belongs to decentralized sites and give the following arguments:

• The absence of a central server means that the system is not threatened by a vulnerability known as a “single point of failure”. User assets are protected from technical failures and hacker attacks, as they remain in the wallets of the owners
• The absence of a single governing body makes it very difficult for government agencies to impose any sanctions.

Opponents of DEX also have something to say:

• Limited functionality. Margin trading, pending orders, and other useful features are not available on them. The choice of coins and trading pairs is very limited, cross-chain transactions are available on a limited number of platforms.
• Difficulty of use. The interface of such platforms is still unusual for novice users.
• Operations with fiat currencies are not available.
• Low liquidity.

It is considered as over time these shortcomings are more likely to get eliminated. Furthermore, rejecting any form of centralization will stay an obstruction for the larger investors for a very long time frame, especially for those who prefer to validate the transparency of activities in the legal field.

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