Q1: What does Decentralized mean?

A1: Decentralization or decentralisation is the process by which the activities of an organization, particularly those regarding planning and decision making, are distributed or delegated away from a central, authoritative location or group. (aka no political bs)

Q2: What are Exchanges?

A2: An exchange is a marketplace where cryptocurrency, securities, commodities, derivatives, bonds and other financial instruments are traded. The core function of an exchange is to ensure fair and orderly trading and the efficient dissemination of price information for any securities trading on that exchange.

Q3: What are Decentralized Exchanges (DEX)?

A3: Decentralized Exchanges or DEXs are Fully Autonomous decentralized applications made on top of Ethereum that allow cryptocurrency buyers or sellers to trade without having to give up control over their funds to any intermediary or custodian.

This type of infrastructure is entirely different from centralized exchanges where users hand over their crypto assets to the exchange, which acts as a custodian and essentially issues IOUs for users to trade with on the platform. The key difference is that their backend exists on a Blockchain.

(IOUs: An IOU is usually an informal document acknowledging debt/Credit note essintially)

DEXs were initially conceptualized to eliminate the need for any authority to supervise and approve trades made within a particular exchange. Through the help of smart contracts, DEXs operate automated order books and trades. This makes them “truly peer-to-peer.”

Q4: Types of Decentralized Exchange?

On-Chain Order Books: In some decentralized exchanges, everything is done on-chain. Every order (as well as alteration and cancellation) is written to the Blockchain. This is arguably the most transparent approach, as you’re not trusting a third party to relay the orders to you, and there’s no way to obfuscate them. (Ex:Bitshares and StellarTerm)

Off-Chain Order Books: As opposed to on-chain order books, records of transactions in off-chain order books are hosted in a centralized entity. They utilize “relayers” to help manage these order books. In this respect, off-chain order book DEXs are only quasi-decentralized, unlike other types of DEXs. (Ex:Binance DEX , 0x)

Automated Market Makers (AMM): Automated market makers exploded in popularity in 2020, driving much of the DeFi boom, and are used by popular DEX platforms like Uniswap, Sushiswap and Kyber Network. AMMs have no need for order books. Instead, they utilize smart contracts to form liquidity pools that automatically execute trades based on certain parameters.

Q5:What are the Advantages/Disadvantages of DEX’s

Closing thoughts

Many decentralized exchanges have emerged over the years, each iterating on previous attempts to streamline the user experience and build more powerful trading venues. Ultimately, the idea seems heavily aligned with the ethos of self-sovereignty: as with cryptocurrencies, users don’t need to trust a third party.

With the rise of DeFi, Ethereum-based DEXs have seen a massive uptick in usage. If the momentum continues, we’ll likely witness increased innovation in the technology across the entire industry.