How Decentralized Cryptocurrency Exchange Works?

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The word that has changed the meaning of currency and has taken it into another proportion is Cryptocurrency. A cryptocurrency is a virtual or digital currency that anyone can buy for a specific purpose. Secured by cryptography, this virtual currency is impossible to double-spend or replicate. 

When it comes to cryptocurrency exchange, it can be done in two ways which are: 1. Centralized Exchanges (CEXs) and Decentralized Exchanges (DEXs). Though the CEXs are the more popular ones for crypto exchanges, Decentralized Crypto exchanges are now getting more preference because of their benefits and smooth process. The process of how decentralized exchange works is now attracting many traders and users to DEXs; let’s understand why.  

What Do You Mean by Decentralized Crypto Exchanges? 

Decentralized Crypto Exchanges or DEXs is a virtual crypto exchange platform where cryptocurrency traders (both buyers and sellers) exchange their assets. The thing that distinguishes DEXs from CEXs is that traders can make transactions directly to an intermediary or custodian without handing over the management of their funds. 

The transaction agreements in this exchange are done through self-executing agreements, which are written in codes. These codes are also known as smart codes and are challenging to crack. That means you get a better and safe transaction process. 

How Decentralized Exchange Works? 

A few years back, no one would have thought that cryptocurrency exchange would be a trouble-free and modern way to exchange crypto. This platform allows users to handle their crypto funds and does not have a third-party interface as well. 

In the absence of intermediaries, DEXs work on a non-custodial structure. In other words, we can say that in DEXs, traders retain the custody of their crypto and are responsible for their wallets and other private keys on their own. 

How Decentralized Cryptocurrency Exchange Works:

  1. During a crypto exchange, a token owner places the order to exchange his/her asset with the other available trader on DEXs. The owner specifies all the basic details like the number of units, the exchange token’s cost, and the time duration for the bid. 
  2. Once the owner sets all the information, the bidders can set their bids by singling a buy order. 
  3. After the set time is finished, both the parties review the bid and execute the trading. 

And that’s how decentralized exchange works, seems easy right?  

The Traditional Decentralized Exchanges 

There have been multiple generations of Decentralized exchanges for years, as mentioned below:

1. Decentralized Exchange (Order Books) 

This traditional way of decentralized crypto exchange uses order books for buying and selling assets like the old conventional ways. The order book consists of a record of open buying and selling orders for assets. The spread between the asset prices prevails the depth of the order book and the current market price. 

In these exchanges, all the information is held on-chain during trading while the funds and assets are kept off-chain in the wallet.

2. Decentralized Exchanges (Swaps) 

Another form of Decentralized exchange does not involve ordering books to ease the trading process and setting prices. Unlike order books, it uses liquidity pool protocols to allocate asset pricing. In other words, the exchange platform works on trading with users’ wallets through a swap process between two traders.  

This category has put its place in Total Value Locked (TVL). Examples of this type of DEXs are 1inch Exchange and DiversiFi.    

What is The Difference Between Centralized and Decentralized Crypto Exchange 

Following are the key points on how decentralized exchange differs from centralized crypto exchange: 

Centralized Crypto Exchange  Decentralized Crypto Exchange 
1. The traditional way of crypto exchange that involves intermediary between two traders,  A modernized way for crypto exchange with direct traders with no intermediary. 
2. The control is in the hand of the platform as it involves an official management. The control is in the hand of the user only. 
3. The centralized crypto exchanges charge fees for carrying out the trading.  There are no fees for trading in decentralized exchanges. 
4 Uses written formats for clear information.  Involves smart codes which are hard to hack.

Get The Best Crypto Exchange Development Services 

Cryptocurrency has taken a massive hype in the world of trading and investment. Even in the most competitive market scenarios, its potential makes people believe in it. After a tremendous change in the market’s financial system to return financial power to people, cryptocurrency is at a boom to set a new and modern financial paradigm.

And with the ever-increasing demand for crypto, the demand for crypto exchange software is also increasing rapidly if you are evolving or establishing an organization in the world of finance, set up the crypto exchange development with the best crypto exchange development services for you. 

At Appinop Technologies, we excel in on-demand crypto exchange development services for every business that wishes to inherit a crypto exchange with industry-leading features, impenetrable security, and a meticulously designed user interface. 

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.