What Is a Decentralized Exchange & How Does It Work?

dominodex
5 min readJun 14, 2022

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The use of currency and fiat money have radically changed in recent years. And as cryptocurrency is gaining worldwide acceptance, it sure will take the financial world by storm and reshape the world of fintech as we know it.

Most people are preferring cryptocurrencies due to their revolutionary blockchain technology. Additionally, the number of centralized and decentralized platforms for trading and swapping digital currencies are increasing, as different exchanges provide different benefits to users.

DOMINO DEX is a one-of-a-kind decentralized exchange that does not require you to provide any personal information.

DOMINO DEX gives you the liberty to enjoy minimal trading fees and zero hidden charges. Moreover, another great advantage of this DEX is that there are no minimum requirements for deposits and withdrawals. You can connect your MetaMask wallet, and your assets go directly to your wallet.

The major difference between decentralized and centralized exchanges is that decentralized exchanges are peer-to-peer networks where cryptocurrency traders make their transactions directly without giving control of their funds to a third party. Many traders prefer to trade at DEXs because they do not include a third person or another company. Likewise, these platforms give the entire responsibility to the user for securing their assets.

Moreover, smart contracts use code language to facilitate the execution of agreements. To bring the uninitiated up to speed, a smart contract is a self-executing contract where the terms of the deal are written directly in lines of code and are directly applicable between buyers and sellers. Furthermore, there is a distributed, decentralized blockchain network in which the code and agreements exist. The transactions are tracked, irreversible, and controlled by the unique code.

This feature makes it a secure and a distinct way to trade securely. DOMINO DEX is a one-of-a-kind decentralized exchange where traders can trade securely without paying hefty fees. Traders can execute orders directly on decentralized exchanges using smart contracts without the need for an intermediary. Also, markets that pair buyers and sellers of cryptocurrencies are referred to as peer-to-peer (P2P).

Additionally, non-custodial wallets allow users to keep control of their wallet’s private keys. Users can access their cryptocurrencies using a private key, which is an advanced form of encryption. Once logged in with a private key, DEX users can immediately access their crypto balances. There is no requirement to submit any kind of personal information such as names and addresses. As with the newest decentralized exchange, DOMINO DEX is a next-level DEX that provides even more convenience to people trading cryptocurrencies.

A centralized exchange is operated by one central authority that manages a network of transactions. While it provides services that make money to move easier, centralized exchanges are much more susceptible to hacks and data breaches than decentralized exchanges.

Another difference between centralized and decentralized exchanges is that decentralized exchanges allow users to interact with smart contracts from their wallets. Traders must take full responsibility to protect their funds. In any case, if they make mistakes like losing their private keys or sending their funds to the wrong recipients, only they are at fault and cannot contact the third party to retrieve them.

Many decentralized exchanges are built on top of leading blockchain technology and support smart contracts. Based on layer-one protocols, they are created directly on the blockchain. Currently, the Ethereum blockchain is the most commonly used for DEXs.

Advantages of DEX

Decentralized exchanges are a secure platform for cryptocurrency traders. Sometimes, it can be costly to trade on decentralized exchanges, especially when network transaction fees are high. However, a great way to understand more how decentralized exchanges operate is through their advantages:

Here are some of the advantages of DEX:

1. Provides More Security

In decentralized exchanges, users can grant full ownership over their money and do not need to transfer their assets to a third party. With this, users’ funds and personal data would have an assurance of greater safety from hackers and theft.

Another reason is that privacy is well protected. One of the biggest advantages of decentralization is the enhancement of security it offers. Since users don’t have to deal with third parties, decentralized exchanges allow them to easily control their transactions.

2. Anonymity

The purpose of decentralized exchanges is to allow investors to buy and sell their crypto assets anonymously and securely. It does not require customers to fill out a standard identification process, also known as Know-Your-Customer (KYC) forms so users’ anonymity is preserved on DEXs when they exchange one cryptocurrency for another.

Unlike in centralized exchanges, users do not need to go through collecting personal information such as full name, email address, and other government-issued identification documents. In contrast, DEXs can attract a large number of people who do not wish to be identified as a part of private transactions.

3. Token Availability

DEXs enable users to trade new cryptocurrencies that are difficult to trade elsewhere. All tokens can be traded via dApps. Decentralized exchanges can include any token minted on the blockchain that is built upon, which means they are likely to list new projects before they are available on centralized exchanges.

Using Decentralized Exchanges

There is no sign-up process needed to use in a decentralized exchange. You do not have to submit your personal information or give an email address. The exchange’s smart contracts require traders to use an exchange wallet. For instance, to experience seamless trading, users can simply connect their MetaMask wallet to DOMINO DEX and start trading without putting in any personal information. The DEXs’ financial services are available to anyone with a smartphone and internet.

Let us explore the basic changes among different types of DEXs:

On-Chain Order Books

One key category of DEXs is the on-chain order book. This platform writes every P2P transaction to the on-chain order space and records it.

Off-Chain Order Book

These blockchain-based transactions are primarily recorded off-chain, instead of in the on-chain order book.

Automated Market Makers (AMM)

The next type of DEX is the Automated Market Maker (AMM). The different feature of these DEXs is that it does not include order books like the last two categories. Trades can be made without a counterpart. Whereas, a smart contract is used to operate the trade, where you directly buy or sell from the liquidity pool.

The Future of DEX

DeFi has already seen large amounts of capital flooding into DEXs throughout 2021 as a result of the massive adoption of the technology. For DEXs to reach mass adoption, a few major challenges must be overcome.

● Lower gas fee

● A lower technical barrier to entry

● Seamless ecosystem for P2P trading

In conclusion, decentralized exchanges have multiple benefits and they offer the easiest way of trading crypto tokens. DEXs also have a few major cons and disadvantages. As there is no central entity verifying the information traditionally submitted to centralized platforms, these platforms are having difficulty adhering to KYC and Anti-Money Laundering (AML) requirements. Nonetheless, regulators can still oversee the decentralized platforms.

DeFi and DEXs both have pros and cons that should be understood completely before proceeding. You should do enough research on any protocol you intend to interact with, to ensure you understand the risks involved, how privacy and security work, and ensure your funds are properly stored in a non-custodial wallet.

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dominodex

DOMINO is a next-generation decentralized exchange (DEX) that supports new and rising crypto tokens. Use DOMINO and have a seamless trading experience today.