DEX – Decentralized Exchange
Decentralized exchanges facilitate direct peer to peer exchange of cryptoassets between users.
Introduction
Commonly referred to as DEXs, decentralized exchanges are considered an important component to the emerging decentralized finance (DeFi) stack being built in response to issues with legacy financial services providers.
DEXs arose in response to security and privacy concerns with the centralized exchanges historically used to buy and sell cryptoassets. Instead of needing to open an account and compromise privacy via the Know Your Customers processes centralized exchanges require to onboard users.
DEX users can start exchanging cryptoassets instantly and directly between their wallets. Minimizing the risk of their coins being pilfered by hackers targeting centralized exchanges.
A challenge for DEXs is front running. Since DEX orders are broadcast to the network and only settled when finalized in a future block. It is possible to pick off orders by placing the same trade, “front-running” the existing agreed upon trade, by paying more for your transaction to be settled first.
A number of models exist to implement DEXs with a focus on aggregating liquidity so enough orders exist for transactions to be conducted.
- 0x built a protocol intended to set up a network of exchanges, referred to as relayers, able to interoperate to make and take orders across its network.
- Uniswap implemented an automated market maker algorithm to ensure liquidity is always available to settle trades.
- Kyber employ the reserve method. Users place trades and then the network finds the most favorable counter party to transact with. Trades settle if the proposed counter party’s terms meet the users required minimum entered when proposing the trade.
Further DEX Reading
3 Minute Tips: Avoiding Front Runners on Decentralized Exchanges