You’re probably familiar with the procedure when it comes to cryptocurrency exchanges. Sign up using your email address, create a strong password, validate your account, and begin trading cryptocurrencies immediately afterward.
Decentralized exchanges operate in a similar manner, albeit without the burden of registration. In the majority of circumstances, there is no depositing or withdrawing cryptocurrency. The transaction takes place directly between the wallets of two users, with little (if any!) involvement from a third party.
Decentralized exchanges can be a little more challenging to navigate, and they may not always have the assets you’re looking for in stock. Luckily, PrivacySwap will be launching its very own Decentralized Exchange with an interface that is easy to interact with and swap any tokens available without the need for an intermediary.
The important role of DEXs
Since the inception of Bitcoin, exchanges have played an important role in bringing cryptocurrency buyers and sellers together in a seamless transaction.
We’d have significantly less liquidity and no means to agree on the correct price of assets if these forums didn’t attract a global user base of participants.
Players with a strong concentration of power have traditionally held sway in this field. However, as a result of the quickly evolving stack of technologies that are now available, an increasing variety of instruments for decentralized trades are becoming available.
Any peer-to-peer switching might, in theory, represent a decentralized transaction. It is a platform that mimics the functions of centralized exchanges, but the most significant difference is that its backend is built on the blockchain.
Anyone does not have access to or custody of your funds, and you do not have to rely on the exchange to the same level that you would in the case of centralized offerings if you do not want to.
How a centralized exchange works
With a traditional centralized exchange, you deposit money in fiat (through bank transfer or credit/debit card) or cryptocurrency (via cryptocurrency exchange). When you deposit cryptocurrency, you relinquish control over it. From a usability aspect, you can still trade it and withdraw it, but from a technical standpoint, you are unable to spend it on the blockchain.
Because you do not possess the private keys to the funds, you request that the exchange sign the transaction on your behalf when you request a withdrawal. The exchange allocates balances to users in its own database when you’re trading because transactions don’t take place on-chain when you’re trading.
Because blockchains operate at such slow speeds that trade is not hampered, the overall workflow is extremely simplified, and everything takes place within a single entity’s system. Cryptocurrencies are simpler to acquire and trade, and you have a greater number of tools at your disposal.
This comes at the expense of your independence since you must place your trust in the exchange with your money. As a result, you put yourself in danger of being a counterparty to the transaction.
How a decentralized exchange works
While DEXs are analogous to their centralized counterparts in some aspects, they are radically different in other respects. First and foremost, customers should be aware that several distinct types of decentralized exchanges are available to them. The common thread running through all of them is that orders are executed on-chain (via smart contracts), and that users do not lose custody of their funds at any stage throughout the transaction.
Although some research has been done on cross-chain DEXs, the most popular ones are focused on assets that are stored on a single blockchain (such as Ethereum or Binance Chain).