What are decentralized exchanges and how do they work?

Uniswap Logo on digital blue and purple gradient background, with faded price candlesticks in background

Anyone who buys cryptocurrency will likely be familiar with the process of creating an exchange account and buying cryptocurrency with dollars, but many have never used a decentralized exchange, or “DEX’, to exchange one cryptocurrency for another. While DEXes have many amazing benefits for the industry as a whole, they also present regulatory and consumer protection challenges, and are frequently used by fraudsters and hackers as aids in crypto crimes.

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To buy cryptocurrency with fiat currency (i.e. digital dollars), buyers usually open an account with a central exchange such as Coinbase or Binance. All centralized exchanges require users to deposit their money/cryptocurrency to buy/sell anything, which could be devastating if the exchange is hacked. Exchange hacks were so common during the early blockchain years that crypto veterans now distrust centralized exchanges and keep their crypto in hardware wallets, providing protection from hackers, until they are ready to sell. This would be the reality for many crypto holders for several years, until the Uniswap protocol changed everything.

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Uniswap It was the first DEX (also called “automated market maker“, or AMM) to see mass adoption by crypto users. DEX is a crypto-exchange application that uses blockchain smart contracts to exchange tokens, which allows users to buy/sell cryptocurrencies directly from their wallets. Queen Bees He explains that DEXes allow users to list and sell cryptocurrencies without intermediaries, which has been a miracle for new crypto projects. DEXes are built for the ERC-20 token standard, which also makes them compatible with all stablecoins (a $1-stable cryptocurrency), but not compatible with NFTs. Today, thousands of cryptocurrencies are being sold in DEXes, and crypto miners are searching for “1000x gem“They should know how to use one. Despite the simplicity of their interfaces, DEXes are not easy for beginners to use cryptocurrencies, because they deal exclusively with cryptocurrencies, and they require the user to connect the wallet and pay their gas fee, and the user must know for sure that they They trade against the correct symbol.

DEXes are innovative but also problematic

DEXes compatible with Ethereumliquidity pools“Instead of traditional order books to facilitate trading. It is practically impossible to use order books on Ethereum and similar blockchains for a number of reasons, so liquidity aggregators have been created to solve these issues. The liquidity aggregator is a smart contract where”liquidity providersPresenting tokens (“Liquidity”) that other users trade with, and offer a share of the trading fee as an incentive to do so Queen Telegraph It details that providing liquidity is very risky and should only be pursued by advanced users who can mitigate the risks. The big advantage of DEXes is their ability to continue operating when centralized exchanges go out of business during periods of high volatility, and because DEXes can be used by other smart contracts, they can allow Web3 companies to accept any token as a payment method.

However, DEXes have drawbacks. It can cause big deals.”sliding“, which greatly affects the price of the token and reduces the final amount received, making it difficult to provide the specified demand capabilities to users. DEXes cannot trade tokens via the blockchain either, which is limited to tokens built on the same blockchain. DEXes are also Regulatory nightmare, as they are often used by hackers to exchange stolen stablecoins before running them through a crypto-mixing service like Tornado Cash.Scammers also use DEXes to list their crypto scams, and have the ability to empty the liquidity pool once victims have traded enough legitimate coins for the scam coin, Send the price to zero.

DEXes are an important part of the infrastructure in decentralized finance, allowing users and smart contracts alike to exchange any two cryptocurrencies (of the same chain) in a single transaction. They are so important that every smart contract blockchain has at least one, such as PancakeSwap on Binance Chain, Quickswap on Polygon or Raydium on Solana. While it is a problem at times, DEXES is a powerful innovation of the blockchain that may shape the financial system of the future, and will be an invaluable component in the age of the blockchain-powered Web3 internet, although it is not known how regulators will address their issues.

Sources: UniswapAnd the Queen BeesAnd the Queen Telegraph

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