Insight into Decentralized Exchange Protocol
Before, heading to the question, “what is a decentralized exchange?” we first need to get acquainted with the term, “centralized” and how it fits into the context of digital currency exchanges. In essence, “centralization” -means the allocation and concentration of power in a single entity or organization, thereby, all the major decisions and actions at the most basic level, all subjects and actions at the most basic level is subject to the approval of topmost management, making it a perfect follow up of well organized, systematic and consistent reservation of authority at central points in the organization. The implication of centralization can be:-
· Allocation of decision making power at the top level.
· Allocation of operating authority with the middle-level managers.
· Allocation of operation at a lower level at the directions of the top level.
Under centralization, the important and key decisions are taken by the top management and the other levels are into implementations as per the directions of the top level. Consider an example, in a partnership-business model, the Partner A & B being the owners decide about the important matters and all the rest of functions like a product, finance, marketing, personnel, are carried out by the department heads and they have to act as per instruction and orders of these two people. Therefore, in this case, decision-making power remains in the hand of the partners A and B. Hence, in the case of centralization, the entire power is concentrated in the hand of a single entity.
In contrast to this, “decentralization” refers to the distribution of power and control to a number of points and locations, making it a systematic delegation of authority at all levels of management in the entire organization. Henceforth, in a decentralization concern, authority is retained by the top management for taking major decisions and framing policies concerning the whole concern, while rest of the authority may be delegated to the middle level and lower level of management, thereby, delegating to the lowest level of authority except that which can be controlled and exercised at central points.
To understand the process of decentralization in more simpler terms, let’s consider an example, the general manager of a firm is entitled to look after all the activities taking place in the organization, is it receiving a leave application or managing the entire workforce. To make this process faster, the general manager may delegate his work to the personnel manager who is now responsible for receiving the leave applicants. In this very situation, we can clearly observe the delegation of authority. On the other hand, on the request of the personnel manager, if the general manager delegates this power to all the departmental heads at all level, then this very case is the case of “decentralization”. Further, there is a saying that “Everything that increasing the role of subordinates is decentralization and that decreases the role is centralization”.
In context to the Digital currency exchanges and the blockchain ecosystem, a centralized Digital currency trading exchange is one that endows power in a single authority that holds users’ personal information, transaction history, and fees are collected and monitored by a third-party middleman. Conversely, decentralized exchanges, also known as DEXs, eliminate the need for any such third-party and intermediaries and thereby, connects users directly to one another. Here, in this article, we’ll be discussing more the Decentralized exchange protocols.
The Value of Decentralized Exchanges
Decentralized exchanges are meant to establish an exchange of value between two parties, where, bound by smart contracts, the participating parties enter into an agreement which is executed when the terms and conditions from both sides are fulfilled. Thus, instead of matching a user’s buy and sell orders in a Digital currency exchange order book, orders are matched in real-time via peer-to-peer (P2P) mode in which the actual people behind those orders accomplishes the deal on a one-on-one basis.
Decentralized exchanges thus, brings seamless, secure, & transparent transactions across an evolving network that carries great value for the blockchain community.
How Do Decentralized Exchanges Work?
A decentralized exchange primarily focuses on the following properties:-
· Blockchain trade clearing.
· The ability for users to retain control of their funds.
· Hosting an order book in some decentralized manner.
A decentralized exchange runs over a decentralized exchange protocol which is a peer to peer network. The nodes relay orders to others over a programmatic interface following a standard trade order format, a way to reward those who spread orders, and a way to complete a trade when a match is found. Some of the examples include Kyber, 0x, Swap, OmiseGO, and OasisDEX.
Benefits of decentralized exchange Protocols
Decentralized exchange protocols bring numerous benefits, in addition to the benefits being served by the decentralized exchanges. Firstly it allows users to keep control over their funds, thereby, mitigating the risk of the exchange being hacked or going insolvent. This can lead to higher liquidity, as users may leave orders open on the orderbook for longer as the counterparty risk is gone. Secondly, they create global order books which are borderless and can be accessed from any part of the world. Thirdly, they are easy in functioning as no signups are required. Let’s have a look over the benefits being served by the decentralized exchange protocols!
Liquidity
Extending to the idea of global order books, decentralized exchange protocols brings up more liquidity. Orders having a standard format can be matched by anyone in any venue, from a p2p relay network to a decentralized exchange app to a text message. For instance, one may check out the 0x order generator that lets one create a link to a trustless trade which can be further passed on to anyone to complete it.
Smoothly run the DApps
Decentralized exchange protocols further create a pleasing working environment for the smooth operation of the decentralized applications (dapps). For example, a DApp might operate under a combination of ether to commit transactions to the blockchain, Filecoin to store and retrieve data upon need, like Golem to perform more heavy computation, and a token native to the application itself. But, it’s a matter of concern that while launching such an app, it’s unlikely that a user will have all of these tokens in the required proportions at the right time to seamlessly run it. Thus, a just-in-time mechanism for acquiring tokens is needed, which can be done by integrating a decentralized exchange protocol, where no third-party API or account setup is required.
Consider the working of the smart contract, which is a Dapp requires a collaboration of different tokens in the right ratios to operate. Hence, it needs to call other smart contracts, so they can directly access decentralized exchanges and avail web-based API calls. As a result, blockchain native Dapps and scripts operate smoothly with the use of decentralized exchanges.
Customizable
Another unique feature of the Decentralized exchange protocols is that it is an open standard protocol that is easy to customize as per the need. For example, dYdX, a protocol for decentralized derivatives built over 0x order, allows people to create any sort of custom product they want using these protocols which can be later made available to anyone else to trade, use, or modify.
Adaptation to new tokens
Decentralized exchange protocols are proven to be very versatile in adaptation to new tokens. For applications requiring thousands of tokens to run this, protocol proves to be a good choice where the programmatic interface of decentralized exchange protocols allows users to customize the apps as per the requirement.
Drawback
Besides being one of the most suitable interfaces for the running of dapp, it needs users to manage their funds on their own, and the security tools used for that are immature. Further, the absence of a block reward-like incentive supercharger in decentralized exchange protocols makes their network effects harder to get off the ground in comparison to other tokens.
Considering all these aspects, decentralized exchanges which have directly and indirectly have been benefited from a surge in technical developments at both the protocol level and application layer of blockchains. Due to this, we have seen developments from both a technical and regulatory perspective. Further, the future of decentralized exchange is overwhelming, based on the current scenario, the number and scope of assets that become tokenized are likely to flourish in current financial markets by orders of magnitude. Additionally, the decentralized exchange protocols, allows these tokens to be tradable on unified global markets. But, unfortunately, despite being a most preferred interface for privacy-oriented users, decentralized exchanges (DEXs) continually see lower volumes than centralized exchanges and require a better knowledge about the use of digital currencies to use it more wisely in comparison to the other exchange services.
Further, these technologies are successfully painting a whole new picture of a promising landscape of interoperable tokens, seamlessly swapping among blockchains without intermediaries or custodianship. While the more promising and encouraging picture of DEXs still has a long way to do to reach such a milestone.
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