2021 has witnessed a boom in cryptocurrencies, with the global market cap reaching a new all-time high. New trends in the blockchain market such as Non-fungible tokens (NFTs) are bringing cryptocurrencies to the top of blockchain headlines. It leads to an increase in interest and demand for DeFi (Decentralized Finance). As a part of DeFi, decentralized exchanges (DEXs) are attracting huge attention currently. It is recorded that the trading volume of DEXs surpassed $11 billion in August 2020 thanks to DeFi’s popularity. Although centralized exchanges (CEXs) dominate cryptocurrency trading activities now, decentralized exchanges (DEXs) are rapidly gaining popularity among tech-savvy and the blockchain market. For example, Uniswap is a decentralized exchange that currently hits $2 billion transactions per day. So, in this article, we will tell you about how DEX Development benefits its users.
- 1. How does a crypto exchange work? What are the differences between DEXs and CEXs?
- 2. How DEX development brings advantages for users?
- 3. From Centralized exchanges to Decentralized exchanges
1. How does a crypto exchange work? What are the differences between DEXs and CEXs?
A decentralized exchange (DEX), such as PancakeSwap or Uniswap, is defined as an autonomous financial protocol powered by smart contracts and peer-to-peer payment systems. In DEXs, traders can transfer digital assets to others and all transactions are recorded and viewable on the blockchain. DEXs does not involve any intermediary for clearing transactions, instead, they use smart contracts to execute and verify transactions. Meanwhile, Centralized exchanges (CEXs), for example, Binance, are online trading platforms that enable buyers and sellers to match each other through an order book. The concept of a CEX is online brokerage and that makes CEXs popular and the dominant online trading platform. The main differences between DEXs and CEXs come from custody and centralization.
Custody is all about who owns the keys of accounts on the exchanges. DEXs are non-custodial, meaning users remain in control of their private keys when making transactions on a DEX platform. When using decentralized exchanges for trading, users own all funds in their private wallets. They can submit, choose and confirm trades by themselves with personal wallets, considering the exchanges as a matching service. A non-custodial exchange allows customers to make a match and cancel it through a smart contract. Meanwhile, centralized exchanges are custodial. In CEXs, users do not have total control over their crypto. For example, if users buy a Bitcoin in a CEX, they don’t own these coins yet. Before buying Bitcoin, they have to request CEXs to transfer that coin to their external wallet address. So, in the process of transferring digital assets to your wallets, if a CEX is hacked, or has technique problems, your assets purchased can disappear.
Centralization refers to the places where orders are matched and executed. In DEXs, all the functions such as finding and making order matches, rely on smart contracts and “relayers”- the network of trusted nodes. Meanwhile, order books in CEXs are in charge of reviewing and verifying incoming orders to make suitable matches between users. Then, the second step is executing the transaction, by the exchange software and servers. CEXs still involve middlemen and, in contrast, DEXs do not use any intermediary and facilitate crypto-asset exchanges by matching and executing trades through smart contracts.
2. How DEX development brings advantages for users?
a. DEX development provides privacy and security
As mentioned above, DEXs are non-custodial, which makes them more secure than CEXs. DEXs do not require users to share the control of private keys to make transactions successfully, while CEXs hold customer’s private keys on their behalf. This leads to the fact that if CEXs are hacked, private keys can be revealed and digital assets of customers can be stolen. Additionally, there are no third-party organizations in the process of executing trading activity on DEXs since all the activities are verified and executed by smart contracts and blockchain technology. Although DEXs bring better privacy and security for users than CEXs, they are still searching for DEX Development services to upgrade their privacy systems and bring better users’ experiences.
DEXs are based on a complicated network of computers, which makes cybercriminals find difficulty in hacking. If a hacker accesses and alters information in a decentralized platform, others computers will realize errors promptly with tamper-proof and reject the changes. Hacking activities are only successful when hackers can simultaneously make changes by 51% of computers systems, placed in different nations.
b. DEXs keep traders anonymous
Unlike CEXs, DEXs do not require customers to create on-exchange accounts, verify identity, and provide personal information such as passports, identity cards, or face verification through a know-your-customers (KYC). It will be a big problem if this important personal information is hacked and used for cyber-crime such as fake trading or money scam. Therefore, no-identity-check decentralized exchanges ensure that customers’ information can not be leaked.
c. Crypto diversification in DEXs
According to Statista, in august 2021, nearly 6000 cryptocurrencies are appearing on the market. However, CEXs only accept trading activities with listed cryptocurrencies and applying a secure standard to ensure profitability and legal compliance. Normally, centralized exchanges only support the most popular cryptocurrencies existing in the market. Meanwhile, DEXs accepts not only famous coins but also less-popular crypto, providing these tokens opportunities to involve in trading activities. Consequently, many traders have started using DEX for online trading since it provides a greater amount of altcoins than CEXs. With a DEX, users can exchange the latest cryptocurrency that previously was hard to trade.
d. DeFi and NFT Integration
DeFi and NFTs are getting more attention than ever before. The DeFi industry has seen rapid growth since Dapps and NFTs are the hot trends now. In July 2021, it is recorded that the Dapp sector hit over 1.4 million daily users, an increase of nearly 24% compared to the previous month. 2021 is also a big year for NFT-based projects, especially in the gaming sector, such as Axie Infinity – an NFT game developed by the Vietnamese team. With the fast-growing DeFi Development, DApp development, and NFT development, DEXs can be strong supporters. NFTs and DEXs are using smart contracts to provide better security and privacy for their customers. So, by using a DEX, customers can easily access smart contracts and decentralized applications (DApps), which involve several financial services such as lending.
3. From Centralized exchanges to Decentralized exchanges
Nowadays, although CEXs is the dominant online trading platform that includes both fiat and cryptocurrencies, the rapid growth of DeFi and NFTs brings a great opportunity for DEXs. Some DEXs such as Uniswaps are attracting more and more users with better security and greater choices of tokens for trading activities than CEXs. Perhaps decentralized exchanges are far from perfection, it has huge potentials because of the high level of privacy, security, diversified tokens and advantages from non-fungible and decentralized app integration. The rise of DEXs leads to an increased number of businesses considering DEX Development.
If you have an intention of building or upgrading your DEX platforms, we can provide suitable solutions. SotaTek, with experienced IT experts, has conducted over 350 projects with clients from over 20 nations. We provide not only Web App Development services but also NFTs development services, Crypto Exchange Development Services, DEX Development or DeFi Solutions Development. So, don’t hesitate to contact us for more information.