What is DEX and Why it will replace Stocks and Forex in the future.
What is DEX or Decentralized Exchange?
I’m sure you have heard a lot about ‘decentralization’ and ‘decentralized exchanges’ and wondered what its all about.
You are alone, here is a clear definition of DEX.
Decentralized exchanges, also known as DEXs, are peer-to-peer marketplaces where cryptocurrency traders make transactions directly without handing over the management of their funds to an intermediary or custodian.
These transactions are facilitated through the use of self-executing agreements written in code called smart contracts: by this, DEXs fulfil one of crypto’s core possibilities which is: fostering financial transactions that aren’t officiated by banks, brokers, or any other intermediary.
Before DEX, was stock exchange and Foreign exchange.
Stock exchange isn’t new, it has been in existence for almost 300 years; it’s simply where stockbrokers and traders buy and sell securities, such as shares of stock, bonds and other financial instruments.
Although there are similarities between the Stock exchange, foreign exchange market and Crypto exchanges, the latter is quite different with the major difference being decentralization.
While Stock and Foreign exchanges are centralized, crypto exchanges like DeFi are decentralized.
Now we understand the concept of Forex, Stock exchange and Crypto exchange, let us go to the definition of Forex.
Foreign exchange markets, or forex, is the field of investing in foreign currencies. In this case, you invest in the exchange rates between currencies, making money as currencies gain or lose value against each other.
All exchanges are loved and preferred by their users for different reasons; here are the major reasons I believe DEX is the real game changer.
- DEX allows users to trade right away without signing in, without any rules giving people who want to trade anonymously the opportunity to do so.
- In Stock, forex and other centralized exchanges like Binance, “know your customer” (KYC) rules and some regulatory requirements are compulsory.
- Unlike forex and stocks, DEX is an exchange that works directly on a cryptocurrency without a central governing institution.
- Forex trades 24 hours a day and 5 days a week, but Crypto never sleeps.
- In addition to trading 24 hours per day, crypto trades a full seven days per week. At any time of any day, you can buy and sell crypto with your exchange.
- DEXes are non-custodial (you have custody of your crypto at all times), whereas Forex and stocks are custodial (they keep control of any funds you deposit on their platforms).
- DEX is capable of worldwide reach, anyone with a phone and internet connection can trade on a DEX platform, same cannot be said for Forex or Stocks, they are subject to localized channels.
- Trading on DEX is faster than Forex and Stocks.
That doesn’t mean DEX is not without disadvantages, it’s still a growing process with lots of hitches, cryptocurrency is highly volatile, t awareness is low and still new, many people don’t fully understand what its all about and the the finance world is yet to decide whether to go with decentralization or not.
But having listed out its advantages, there is no doubt that soon there be a breakthrough in the next future
So now,
How does a DEX work?
Since DEX is decentralized and its transactions are settled directly on the blockchain, there are no sign-up processes and DEXs do not allow for exchanges between fiat (normal currency eg USD) and crypto; instead, they exclusively trade cryptocurrency tokens for other cryptocurrency tokens.
With DEX, you don’t need a broker, third party or bank to operate, all you
need is a smartphone, an internet connection, a wallet that supports the smart contracts on the network, a supply of Ethereum and access to crypto exchange and a liquidity pool like Uniswap.
You may be wondering, what the heck is liquidity pool? 🤔
Well, here you go!
What is a Liquidity Pool?
A liquidity pool is a collection of digital assets accumulated to enable trading on a decentralized exchange (DEX).
They play a significant role in how decentralized exchange works as they enable traders to execute orders and earn interest in a permissionless, trustless and transparent manner.
For liquidity pools to exist, there have to be liquidity providers, whose duty is to provide a liquidity pool with funds or digital assets.
This brings up our next question.
What is a Liquidity Provider?
A liquidity provider acts as a middleman in the securities markets by buying large volumes of securities from the companies that issue them and then distributing them in batches to financial institutions who then make them available directly to retail investors.
They can make a profit by earning fees from transactions on the DeFi platform they provide liquidity on. These transaction fees are distributed proportionally to all the liquidity providers in the pool, so the more crypto assets you stake the more fees you'll earn.
But before liquidity pools, centralized exchanges made use of order books. This model matched orders by using a matching engine to automatically sift, fulfill, buy and sell tokens. It was also great for facilitating efficient exchange and allowing the creation of complex financial markets.
With Decentralization, there is no need for order books, rather liquidity pools use AMMs (Automated Market Makers).
With liquidity pools along with an algorithm, AMMs (Automated Market Makers) can automate the process of pricing and matching orders on the exchange, and also determine the prices at which buyers and sellers can trade assets, AMM also enables users to purchase and sell crypto assets in a trustless, peer-to-peer fashion without needing to rely on a custodian or other third party.
Automated market maker (AMM) can be defined as a peer-to-contract (P2C) or a type of decentralized exchange (DEX) protocol that allows users to buy and sell digital assets without the need for a third-party intermediary.
To use a DEX eg Uniswap, you will have to:
- Buy Ethereum from an exchange
To this, you will have to create an account with an exchange like coinbase, Gemini, or crypto.com and then link it to your bank account for easy transfer of funds, with these funds in your coinbase, you can purchase ETH.
NB; there is Coinbase.com which is a crypto brokerage where you buy or sell crypto in exchange for cash, it stores your crypto for you after you buy it.
And there is Coinbase wallet which acts as a traditional cash wallet that gives you direct and complete control over your crypto assets.
You do not need a Coinbase.com account to use Coinbase Wallet.
- Send the ETH you bought your Ethereum wallet.
Your wallet could be Coinbase, Metamask etc
When you open a wallet, you will be assigned a wallet address (usually a long string of numbers and letters.) This will be the address you will send your Ethereum to.
On your exchange, navigate to your Ethereum position. From there, you should see an option to send your ETH. Click on this and enter the address from your wallet. Hit send and your ETH should be in your wallet within a few minutes.
- Connect your Coinbase, Metamask or any other wallet to Uniswap.
Once you have a wallet containing ETH, you can navigate to the option where it says connect a wallet, you can do so by choosing a wallet of your choice, once you connect a wallet to Uniswap, you are ready to begin using the technology.
- Make your trade or provide liquidity.
The primary functions of Uniswap are to make trades and provide liquidity.
To make a trade, you simply select the amount of ETH and what token you would like to swap it with, if you would like to provide liquidity and stake your crypto positions, navigate to the “Pool” tab and select a currency pair such as ETH and Aave (AAVE) or Tether (USDT) and Dai (DAI) to provide liquidity for.
Because some currency pairs offer different fee tiers, make sure you find a fee tier and currency pair you are comfortable with.
Hope you enjoyed reading this?
Stay tuned for more! 😊
Credit.
Coinmarketcap.
Gemini
Coinbase.
Freewallet
Investopedia.
Moonpay
Binance
Bezinga
101 Blockchain.
