BTCBAM’s Decentralized Exchange Platform is Loading…

What Is a Decentralized Market?

In a decentralized market, technology enables investors to deal directly with each other instead of operating from within a centralized exchange. Virtual markets that use decentralized currency, or cryptocurrencies, are examples of decentralized markets.

Or for another source; Decentralized exchanges are one of the key building blocks of the decentralized finance (DeFi) ecosystem. A DEX is a platform where users can trade cryptocurrency directly with each other, without using a middleman. A traditional centralized exchange like Binance, for example, acts as a custodian on your behalf, with any trading taking place on Binance’s database, rather than directly on the blockchain itself.

While this is a more beginner-friendly way to trade, it has its downsides. For one thing, a centralized exchange presents a single point of failure, meaning that you could lose access to your funds if the exchange is hacked or faces server problems. Indeed, many centralized exchanges have struggled with downtime during periods of extreme volatility.

There’s also the fact that many centralized exchanges require KYC authentication, which means you’ve got to provide proof of ID such as a driving license or passport (which, again, means trusting that the exchange won’t be hacked, potentially exposing you to identity theft).and your identity details were stolen.

In contrast, DEXs let you trade directly with other users, which means that assets are under your control at all times.

How Do Decentralized Markets Work?

A decentralized market uses various digital devices to communicate and display bid/ask prices in real-time. In this way, buyers, sellers, and dealers do not need to be located in the same place to transact securities. Even in the earliest stages of development, decentralized crypto exchanges offer advantages that impact digital asset custody and diversity, transactional trust, trading fees, and investor privacy.

Custody: DEXs are non-custodial, which means traders don’t need to relinquish the control of private keys to transact. Instead, externally held wallets interact with DEXs, and trades self-execute through smart contracts. Centralized exchanges, by contrast, play the role of custodian for your funds by controlling your private keys. This requires you to relinquish control of your private keys, but centralized exchanges offer trust and security.

Vast variety: If you’re interested in finding a hot token in its infancy, DeFi is the place to be. DEXs offer a virtually limitless range of tokens, from the well-known to the weird and totally random. That’s because anyone can mint a BRC20-based token and create a liquidity pool for it, so you’ll find a greater array of projects, both vetted and unvetted.

Diversity: Now there are 11.179 cryptocurrencies on the market according to CoinMarketCap data. CEXs exercise control over the cryptocurrencies they will list, and will generally only list those with adequate trading activity, prevalence, and effective security standards to ensure profitability and legal compliance. Many altcoins are only accessible through DEXs, where P2P transactions can occur without high trading volumes. This provides a wider opportunity for engagement in digital assets and enhances financial inclusion.

Besides, January’s trading volume on decentralized exchanges soared to set an all-time high above $50 billion, eclipsing the previous record of $26 billion from September 2020 by a wide margin, according to data from Dune Analytics.

Trustless Transactions: On CEXs, every transaction is overseen and recorded by a central authority, the exchange itself. Through smart contracts, DEXs execute trades and record them to the blockchain, enabling trustless transactions. And since DEXs do not hold your funds, they are less likely to be targeted by hackers.

Lower Fees: Decentralized exchanges function through the use of self-executing smart contracts. In the absence of an intermediary, DEXs use the same “gas” fee structure as the Ethereum blockchain they’re built on. DEXs charge a low fee, around 0.3% for exchanges like Uniswap. Although these fees fluctuate in response to the network utilization, they remain far lower than the costs incurred on centralized alternatives.

Privacy: Traders using decentralized exchanges don’t need to disclose their private keys because wallets are held externally, and the DEX is not liable for the funds. For the same reason, users aren’t typically required to complete KYC and AML procedures when using DEXs. While this may be advantageous in regards to convenience, it is potentially problematic from a legal perspective.

Hacking risks can be reduced: Because all of the funds in a DEX trade are stored on the traders’ own wallets, they are theoretically less susceptible to a hack. (Relatedly, DEXs also reduce what is known as “counterparty risk,” which is the likelihood that one of the involved parties — including potentially the central authority in a non-DeFi transaction — will default.)

Scalability: Blockchain scalability depends on the number of transactions a network can process before reaching capacity. For instance, the Bitcoin network processes 4.6 transactions per second (TPS), while Ethereum achieves 15 TPS. Decentralized exchanges function using smart contracts that live on blockchain networks. As such, DEXs are bound by the limits of their underlying network infrastructure.

User Experience: DEXs are in early stages of development and can be challenging to use for those less familiar with decentralized blockchain technology. First, users need to familiarize themselves with external wallet platforms so they can interact with a DEX. Then, they must fund their wallet by transferring fiat or cryptocurrency. Finally, they need to link this wallet to the DEX interface to execute a trade. The process of depositing funds for trading is significantly more straightforward on a CEX.

Liquidity: Because DEXs are still relatively new and support diverse trading pairs, market segregation has a negative impact on market liquidity. Nevertheless, asset liquidity has been increasing remarkably with the growth of DeFi.

On and Off-Ramps: Current DEX technology does not facilitate the purchase of digital assets with fiat currency like USD, nor can you trade fiat or make withdrawals into your bank account. While stablecoin technology is emerging to replicate the role of fiat in the DeFi ecosystem, the lack of fiat on and off-ramps is a barrier to entry for novice users.