Making the Most of Decentralized Exchanges (DEX)

Cryptocurrency has proven to be a strong alternative financial instrument that facilitates digital transactions and the possibility of trading using means. However, to successfully trade any form of cryptocurrency, you need to have a crypto exchange to start trading the digital currency. That is where decentralized exchanges (DEX) come into play. 

A decentralized exchange enables peer-to-peer transactions without intermediary involvement, operating like stock markets so that cryptocurrency traders can make regular transactions directly. Additionally, decentralized exchanges leverage smart contracts, including any self-executing agreements facilitated by code. But, how can you make the most of the various layers that accompany a decentralized exchange? 

How Does a Decentralized Exchange Benefit Crypto Traders?

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How can crypto traders make more efficient deals through decentralized exchanges?

Decentralized exchanges have been operational since their introduction in 2014, becoming popular as decentralized financial services were increasingly built on blockchain technology while automated market maker (AMM) technology helped ease any liquidity issues the exchanges faced. 

Decentralized exchanges were created to eliminate the need for supervision or authority on transaction authorization on the exchanges. The exchange supports peer-to-peer cryptocurrency trades by directly linking crypto buyers and sellers. Because they are not custodial types of exchanges, decentralized exchanges let users have full control and ownership over private keys, increasing their popularity within the cryptocurrency community. 

There are three types of decentralized exchanges available to crypto traders.

Automated Market Makers 

An automated market maker system, as mentioned earlier, uses smart contracts to eliminate any liquidity issues with the exchange. The system leverages blockchain services to retrieve information from exchanges to set the prices for any traded assets. The services are referred to as blockchain oracles, using the smart contracts to leverage liquidity pools, which are pre-funded asset pools. Smart contracts are a more seamless method than simply matching buying and selling orders. 

To maximize AMMs, users must fund the liquidity pools before being rewarded with transaction fees based on trades allocated for the parties involved. Such users must deposit equivalent values of each asset included in a trading pair, to earn interest on crypto assets through liquidity mining. The pools in an AMM decentralized exchange lets traders earn interest in a trustless and permissionless way while also giving them the necessary control to execute orders. 

Order Book DEXs 

One of the earliest yet most effective forms of decentralized exchanges, order book DEXs keep records of every open order for an asset purchase and sale for specific asset pairs. Buy orders typically indicate a trader’s desire to bid for or purchase assets at a specific price while sell orders show the trader wants to move the asset on or ask for an exact price to sell it at some stage. 

Order book DEXs include on and off-chain order books. The on-chain decentralized exchanges store all open order details on the chain, helping traders to leverage their respective positions by using lender funds on their platforms. Meanwhile, the off-chain decentralized exchanges store the order books from the blockchain network, only authorizing transaction settlements on the blockchain, providing the true value of centralized cryptocurrency exchanges. Additionally, off-chain order book DEXs can reduce transaction costs, though there are smart contract-related risks by doing so. 

DEX Aggregators

Then, there are DEX aggregators, which have been emerging as a top addition within the crypto world. DEX aggregators are trading protocols that consistently source and route liquidity via multiple decentralized exchanges thanks to particular requirements. DEX aggregators include:

  • Slingshot
  • Matcha 
  • 1Inch

By using DEX aggregators, traders can optimize their crypto trading approaches at will. 

DEX Innovation Makes It Easier to Use the Exchange 

Decentralized exchange development has been steadily increasing in recent years with the Integral DEX, for example, showing how to properly blend order book models with AMM models for optimized DEX development. Hybrid decentralized exchanges, meanwhile, offer the possibility of freeing capital from depth, allowing the exchange for mirroring competitor order books on its smaller liquidity reserves. Because of this possibility, the exchange realizes the full value of concentrated liquidity which is also very efficient. 

Additionally, there are various models of the AMM decentralized exchange like Proactive Market Making. The Proactive Market Making style allows the decentralized exchange to proactively modify parameters in real-time, such as price curves, to improve trading precision. 

The Benefits of Using Decentralized Exchanges 

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Decentralized exchanges allow you to trade with any token

Decentralized exchanges are promising avenues for cryptocurrency trading because they prioritize availability, emphasize security, and preserve anonymity, among other benefits. 

Firstly, DEXs offer increased token availability for cryptocurrency traders. Decentralized exchanges provide access to cryptocurrencies that have been minted on the blockchain that they have been developed on. This ensures that new projects list their tokens on the decentralized exchanges before officially listing them on their centralized counterparts. 

Another key benefit for crypto users is that decentralized exchanges assure users of no counterparty risks when engaging with them. Counterparty risk is usually apparent when one of the parties within a transaction doesn’t fulfill their duty. Given that users aren’t required to transfer their assets to an exchange using DEXs, they are less exposed to potential theft or a loss of funds due to cybercriminal activity. Because decentralized exchanges use smart contracts to facilitate trades, users won’t have to depend on any intermediary interventions during a transaction, preserving its validity. Plus, DEXs prevent price manipulation or any trading volume alterations. 

New and obscure cryptocurrencies can be traded that were previously hard to move. And, DEXs are trustless, preserving user funds, personal data and privacy. There is no need to create an on-exchange account when using DEXs, nor is there any requirement to fill out a Know Your Customer (KYC) form, nor do any users need to provide user identification. 

Also, users can make the most of decentralized exchanges as the exchanges do not control user funds at any juncture. Traders own their funds at all times and can interact with the exchanges based on their preferences. Users have full anonymity and can make transactions with other users as they like. 

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Want to know more about cryptocurrency trading and exchanges?  Take a look at our resources to learn more about how crypto works. 

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