Decentralized exchange

Ever since the creation of Bitcoin, about 11 years ago, there was a clear need to build infrastructures with the aim of offering users a place where they could buy and sell crypto; thus the first centralized exchanges were born.

Over the years, however, many of the largest exchanges were hacked, losing large amounts of Bitcoin that they operated and held on behalf of their customers.

Moreover, they did not adhere at all to the ideals which led to the creation of the blockchain, i.e. a network without central authorities governed by its participants, who all had the same decision-making power.

It is quite simple: it is enough to think about history and where it has led us, starting with the Mt. Gox case, the largest centralized exchange until 2014, up until today where the natural course of events and the moral perspective linked to the heart of the blockchain, decentralization, brought us to the current forms of non-custodial management, such as the first decentralized exchanges, the so-called DEXs.

Before moving forward, however, it is good to proceed with some considerations on centralized exchanges in order to understand the advantages that the new decentralized systems have brought.

The disadvantages of having to turn to centralized exchanges such as Coinbase, for example, the current giant, are related to the payment of fees on each type of transactions, something that does not exist in DEXs.

Some of them are in fact intended to remunerate platform managers for the brokerage service they provide, as a sort of broker.

Considering instead the advantages related to what can be their core business, users are given the opportunity to trade their fiat currency for any crypto using their credit/debit card. However, as we will see later, Bancor is also able to offer this service thanks to a partnership with a third party.

The downside of the coin to keep in mind is that anyone who approaches these realities will be subject to the processes of KYC and AML. It is certainly an advantage for the ecosystem considered the greater security that it leads to, but it will certainly not be in line with the principle of decentralization, the heart of the blockchain.

Now let’s move on to what was the biggest change that led to the evolution of exchanges: the conversion from a custodial to a non-custodial system that takes away the power and the ability of platform managers to have control over user funds.

What is the advantage? The greatest added value for asset owners is that every transaction, both internal and external to the platform, travels on smart contracts that exist only within the blockchain.

This leads to a drastic reduction in the probability of users seeing their account disappear due to hackers.

The leading and most used decentralized exchanges within the DeFi world are the following: Uniswap, KyberSwap and Bancor.

All three, because of their contribution and function in this ecosystem, have some common characteristics typical of DEXs. Needless to say, their model is based on non-custodial systems, otherwise, they could not call themselves DEXs!

On each of these platforms it is possible to exchange different Ethereum tokens, hence not only those based on the ERC20 protocol but also the ERC721 tokens for example, and send them freely to the desired address.

They do differ in some features. In the case of Bancor, in addition to Ethereum tokens, it is also possible to exchange native tokens from the EOS blockchain. Moreover, thanks to a partnership with Simplex it is possible to convert fiat currency into ETH, through a VISA or MasterCard, directly on the platform.

KyberSwap, for its part, also features the LimitOrder function, thanks to which the user can preset an automatic order on a token, purchase or sale, choosing the level on which the order will be executed.

Finally, Uniswap, which is the biggest DEX in terms of traded value, provides two very interesting features. The first one concerns the operation of transferring tokens to an address through which there is an option that allows converting two different tokens instantly before sending.

The second one allows to manually add and remove assets from the liquidity pool.

A further advantage of these platforms is that thanks to their accumulated asset reserve generated by the swap and deposit of tokens by users, they are able to provide liquidity to other DeFi platforms, such as those offering Lending and Margin Trading, which is vital for them to run smoothly.