The four primary functions of a crypto exchange are funds deposits, order books, order matching, and asset exchange. All these functions must be decentralized to create a fully decentralized exchange (DEX).
In most exchanges, only the asset exchange is decentralized since the assets are cryptocurrencies deployed on the blockchain that no central authority controls. The remaining three functions, and particularly fund deposits, are typically centralized.
Because of KYC (Know Your Clients) and AML (Anti-Money Laundering) rules, exchanges are often required to have customers’ identities for fund deposits, creating centralized record-collection and data-storage of personal information. Therefore, centralized exchanges (CEX) allow users to transact currencies instead of creating a permissionless ecosystem.
On architectural terms, decentralization means that there is no centrally-governed server(s), and the network nodes are distributed. Currently, perhaps the only genuinely decentralized exchange is Tokenizer, as others have not decentralized all the four functions.
The benefits of a DEX
The most obvious benefit of a DEX is the same as with any decentralized use case, which is based on the principle of eliminating third parties and returning power to Peer-to-Peer (P2P), permissionless models devoid of central entities.
More importantly, decentralization brings censorship-resistance, meaning no central entity can forcefully impose regulations, or even ban currencies and/or the exchange itself. Being censorship-resistance is essential, considering that many countries are clamping down on digital currency trading. For instance, China does not recognize cryptocurrencies as a legal tender, and the banking system does not accept crypto or provide relevant services.
Without DEXs, people’s ability to invest in digital assets is subject to governments, so crypto becomes hardly more democratic compared to traditional asset markets. Governments can exercise control over CEXs, and users become subject to authorities who may track and tax them at any time or ban certain currencies.
The other benefits of a DEX include heightened security. Major cyber-attacks, like the $470 million that was stolen from Mt. Gox, were only possible because the centralized hot wallets of the exchange were targeted, acting as a single point of failure. In a DEX, each user is in private control of their own funds; hence, there is no central point of attack.
Besides, DEXs utilize smart contracts to enable transactions, for example, using contracts as an escrow for P2P transactions. The exchange benefits from the cryptographic security of the underlying technology when the contracts are highly secure. Further, a DEX facilitates faster and cheaper transactions than a CEX, as there is no third-party authenticator.
The Tokenizer DEX
Tokenizer is the first valid decentralized exchange in the crypto space. It offers crypto users a complete crypto trading platform that enables traders to enjoy an innovative and secure trading environment. At its core, Tokenizer is designed to revolutionize cryptocurrency trading and investing based on three pillars- innovation, simplicity, and security.
Tokenizer DEX comprises of a state-of-the-art correspondence algorithm that is capable of capturing and processing over 2500 orders every second, making it one of the fastest exchanges in the crypto space.
Over three-quarters of crypto transactions are processed by centralized exchanges. However, with the numerous benefits offered by decentralized exchanges, this trend is already declining. In line with the decentralized aspect of blockchain technology, switching to DEXs is necessary for crypto users to take advantage of their full potential.
CEXs will shift to decentralized technologies sooner rather than later, but improvements will come from both sides. Users should learn how to protect themselves, and exchanges must offer better security tools and education around common issues and best practices.
Sign up at Tokenizer DEX today to enjoy all the benefits of a decentralized exchange.