Being in the world of crypto finance you have heard of decentralized exchanges but you have understood very little about how they work.
But don’t worry because in this guide I explain how they work and how to best use them.
Unfortunately, the crypto world is made up of very complex projects but after a little practice they become very easy to use.
This also happened with the internet in the 90s when its use was very complicated but today it is always within everyone’s reach.
So let’s see how decentralized exchanges work and why they were created.
Centralized and decentralized exchanges
Before we start explaining how these exchanges work, we need to understand the difference from a centralized and a decentralized one.
As you know, cryptocurrency exchanges have been created to be able to exchange any crypto faster.
Just go to any exchange, which there are many, sign up that it is completely free and start trading crypto.
But over time, centralized exchanges have been subject to continuous hacker attacks see the Mt.Gox case.
These attacks have caused a great deal of loss of both money and personal data which I believe are even more valuable.
The problem is that these exchanges use a single server in which to store all the data and therefore the whole system.
Therefore an attack is very easy because it is enough to violate the server and access the archive by manipulating prices or stealing crypto or data.
That’s why a decentralized exchange was created in which the management of files and data was stored on multiple servers.
So if a hacker is supposed to hack, the system has to hack all the servers connected to the network simultaneously.
That’s why this decentralized system is much more secure and functional than a centralized system.
This is the concept for which Bitcoin was created and on which the whole system of the crypto world is based.
Decentralized exchanges: how they work
Before we understood how we went from a centralized system to a decentralized one but now we understand how they work.
As I said before, the data management system of this type of exchange is managed by multiple servers which in jargon are called Nodes.
All these Nodes interact with each other and exchange data continuously, therefore creating a data network.
Each node consists of a dedicated server where it manages the data that is generated every fraction of time.
Everyone can participate in a node and therefore participate in the system.
The main thing about these exchanges is that they work with the Blockchain and it is therefore that the system is very difficult to validate.
In addition, this system also allows you to generate earnings as it uses crypto tokens.
That is, they are staked (blocked) in the system and in doing so generate other tokens and therefore passive earnings.
You can also create a personal exchange, i.e. create a currency pair or NFT within the exchange itself.
Decentralized exchanges are used primarily to exchange NFTs that non-fungible tokens.
These tokens that are the basis of the Dapp (decentralized application), must be exchanged quickly and safely.
But they are also used in Defi as they have greater security than centralized ones.
How to use them
There are many exchanges that have this function and that are used in Defi or as an exchange of NFT.
To see which exchanges have this feature just go to the Dapp.review site and go to the Exchange section.
Here are present both those related to NFT and those related to Defi.
While if you go to Defi Pulse we can see those connected only to Defi such as Bancor or Kyber.
These exchanges also allow you to make loans using your own cryptocurrency and generate stablecoins.
An example is Compound which allows in addition to the exchange of tokens also to the collateralization of the tokens themselves.
All these exchanges have, except for someone like OpenSea, their own token which serves precisely to keep the system intact and safe.
Those who don’t have it are because they rely on a blockchain such as Ethereum and take advantage of the features.
The concept of using blockchains and tokens together is the basis for the functioning of these exchanges.
Very different thing about centralized ones like Binance where the use of a token or a blockchain does not make sense.
I talked in this article about how OpenSea works and how to use it to exchange NFT.
The only problem that these exchanges still have is that they are not liquid, that is, they have little liquidity inside.
This is a problem because in the event of a flash crash the markets do not have enough coverage for losses.
They can also slow down in confirming orders.
To conclude, I wanted to make a small summary of what I said earlier.
So in this article I wanted to explain how decentralized exchange works and how to use it.
Compared to a centralized one, it is much more secure and allows total control of the account.
These exchanges are still underdeveloped but the trend is certainly growing.
For this article it’s all I look forward to the next.