Differentiating On-chain and Off-chain order books of Exchanges
PrivacySwap has entered the Decentralized Exchange (DEX) market, and with good cause. It may be viewed as a significant step forward for the project, as this would imply a greater number of use cases to enable traders and common users to grow their money alongside us.
We’ve already tackled what a DEX is, and it is a peer-to-peer marketplace where crypto traders do transactions directly with one another. DEXs facilitate financial transactions that are not mediated by banks, brokers, payment processors, or any other type of middleman, thereby realizing one of crypto’s fundamental capabilities. But how is this possible, you ask? It is through what we can on-chain order books.
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On-chain order books
In certain decentralized exchanges, everything is done on-chain. Every order (including modifications and cancellations) is recorded on the blockchain. This is likely the most transparent method, as you are not relying on a third party to convey the instructions to you, and there is no way to conceal them.
Unfortunately, it is also the least useful. Since you are requesting that every node in the network record the order permanently, you incur a cost. You must wait until a miner adds your message to the blockchain, which makes the process tedious.
Some consider front running to be an issue with this model. In markets, front running happens when an insider who is aware of an impending transaction utilizes that knowledge to place a trade before the transaction is executed. Therefore, the frontrunner benefits from the knowledge that is not publicly available. In general, this conduct is unlawful.
Obviously, if everything is recorded on a global ledger, there is no way to front-run in the conventional sense. However, the second type of attack is possible: one in which a miner observes the order before it is validated and ensures that their own order is posted to the blockchain before the targets.
Off-chain order books
In some ways, Off-chain order book DEXs are still decentralized, although they are more centralized than the prior item. Instead of posting every order on the blockchain, they are stored elsewhere.
Where? This varies. A centralized body may be in control of the entire order book. If the entity is evil, it might manipulate the markets to some extent (i.e., by front running or misrepresenting orders). Nonetheless, you would gain from non-secure storage.
Also Read: How to: Calculate your crypto taxes
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