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Highlights
- When you read about crypto, a couple of adjectives that will often precede it will be “peer-to-peer” and “decentralised”
- A decentralised exchange is a peer-to-peer marketplace where transactions are peer-to-peer and free of any third-party interference
- A DEX doesn’t allow exchanges between fiat and crypto. Rather, exclusively trading cryptocurrency tokens for other cryptocurrency token
With cryptocurrency caught up in negotiations surrounding regulations, which governments and official bodies are hoping to impose on the industry, it’s easy to lose sight of the guiding philosophy that cryptocurrency was built upon.
When you read about crypto, a couple of adjectives that will often precede it will be “peer-to-peer” and “decentralised”.
But what does this mean? And are the new regulations that governments around the world (including Australia) are trying to impose, undermine the central philosophy of crypto in the first place?
Peer-to-Peer and Decentralised
Cryptocurrency is the financial equivalent of a bunch of kids having a party and saying “no parents” on the invitations.
In 2008, the Global Financial Crisis hit the world and was considered to be the worst economic crisis since the Great Depression in 1929.
Amongst a number of contributing factors, was the issue of predatory lending by banks and other institutions, where low-income homebuyers were offered huge loans that they ultimately had no way of paying back.
In 2009, after it became clear that many of these same banks wouldn’t experience any retribution for their gross mismanagement, the first crypto blockchain, Bitcoin, was created, promising a system which was to be free of interference from third party institutions. Whereas the traditional economy is centralised, Bitcoin was to be decentralised, ungoverned and completely democratised.
What is a DEX?
A decentralised exchange is a peer-to-peer marketplace where transactions are peer-to-peer and free of any third party interference.
DEXs fulfil an important part of crypto’s foundational aspects by enabling financial transactions without banks, brokers or any other third-party institutions sticking their big old beaks into things.
Image Source: © Darkworx | Megapixl.com
How Do DEX’s Work?
One of the main aspects that differentiates a centralised exchange from a decentralised exchange is that a DEX doesn’t allow exchanges between fiat and crypto. Rather, exclusively trading cryptocurrency tokens for other cryptocurrency tokens.
Take Coinbase, for example, which is one of the more popular centralised exchanges.
Using Coinbase, a user can trade fiat for crypto and vice versa. Users of centralised exchanges can also make more advanced moves, like margin trades or setting limit orders.
A DEX, on the other hand, uses a special algorithm (otherwise known as a smart contract) to establish the prices of various cryptocurrencies against the other.
Furthermore, all the transactions on a DEX are recorded on the central piece of technology upon which crypto is built: the blockchain as opposed to an internal database.
The Best of DEX
Some of the top ranking DEXs, according to CoinMarketCap, include KlaySwap with a 24 hour trading volume of US$35 billion and UniSwap, with a 24 hour trading volume of US$1.66 billion.
Happy Searching
If you’re focussed on keeping an eye on the wider crypto space, a DEX is the place to be as they offer a practically limitless range of tokens.
Of course, with a wider net catching more fish, be careful with some of the tokens out there, but enjoy the variety that can only come with a decentralised exchange.
