In theory, any direct (P2P) exchange can be called a decentralized transaction. But we are interested in platforms that copy the functions of centralized exchanges.
Decentralized Exchange (DEX, decentralized exchange) is an exchange that operates on the basis of a distributed registry, does not store funds and personal data of users on its servers and acts only as a platform for finding matches for applications for the purchase or sale of user assets. Trading on such platforms takes place directly between participants (Peer-to-Peer ) without any financial intermediaries.
Types of decentralized exchanges
DEX exchanges may differ in the degree of binding to a certain currency and the range of currencies that can be traded on this site. It depends on the blockchain on which this or that decentralized cryptocurrency exchange is built.
If it is based on a certain blockchain, for example, on Ethereum, it is mainly focused on a certain currency. On such exchanges, clients are offered a limited range of assets (in this case, ERC20 tokens running on the Ethereum platform).
Other decentralized exchanges provide users with more freedom by allowing them to make secure transactions with various digital assets in their decentralized trading system.
How a decentralized exchange works
In the case of a typical "centralized exchange", you need to transfer your money there — fiat (via bank transfer or credit/debit card) or cryptocurrency. When you transfer cryptocurrency, you no longer control it. You can trade it and you can withdraw it, but you can't spend it on the blockchain. You do not have private keys to your funds, which means that when you withdraw them, you ask the exchange to sign the transaction on your behalf. When you trade, transactions do not occur in the blockchain: the exchange redistributes user balances in its own database.
In decentralized exchanges, orders are executed on the blockchain (using smart contracts), and users do not trust anyone to store their funds.
Regulation of decentralized exchanges
One of the main difficulties associated with the regulation of decentralized exchanges is that in most cases such exchanges are not controlled by specific legal entities or individuals.
This leads to problems with identifying those responsible in case of any violation, difficulties with checking trading activity and identifying possible violations. For the same reason, some already existing rules applicable to centralized exchanges cannot be applied to decentralized exchanges.
Advantages of DEX
1. No identification needed
KYC (user verification) is mandatory on many exchanges. Some feel that this violates their privacy, while others have a problem with accessibility. Since you don't need to get permission to access DEX, no one checks your identity. It is enough to have a cryptocurrency wallet.
2. There is no counterparty risk
Decentralized exchanges are attracted primarily by the fact that they do not hold client funds. Therefore, users are not in danger of catastrophic hacks or leaks of personal information.
3. Unquoted tokens
Tokens that are not allowed to trade on centralized exchanges can be freely traded on DEX if there is supply and demand.
Disadvantages of DEX
1. Complexity of use
DEX is not as user-friendly as traditional exchanges. Centralized platforms offer real-time transactions that do not depend on the block confirmation period. They are also more understandable for beginners.
2. Trading volume and liquidity
The trading volume on DEX is still many times less than on centralized exchanges. But the main thing is that centralized exchanges usually have more liquidity (an indicator of how easy it is to buy or sell an asset at a reasonable price). In an illiquid market, it is more difficult to find someone who is willing to buy or sell an asset at a reasonable price.
DEX is still a relatively small niche, so there is not always a supply or demand for crypto assets that you want to trade. You may not find the trading pair you need, and if you do, the assets may be traded at an unfair price.
3. Fees
Fees on DEX are not always higher, but it is possible, especially if the blockchain network is overloaded.
Prospects for decentralized exchanges
There is an opinion that centralized exchanges will gradually introduce the functionality of decentralized ones, and decentralized ones will work on a friendly interface.
In general, decentralized exchanges are considered the most successful solution for servicing the broad masses of cryptocurrency users. Nevertheless, the problems of scaling the blockchain, as well as the mass use of cryptocurrencies, remain 100% unresolved. In addition, in order to attract more users, decentralized exchanges will first need to solve the problem of the complexity of the user interface, and some are already doing this. Until all the problems are solved, decentralized exchanges are likely to remain a niche product.