Most people who have purchased cryptocurrencies have used crypto exchanges, which are familiar platforms. Currently, popular exchanges predominantly rely on centralized technology, making them prime targets for hackers due to the large amounts of stored crypto assets.
Simultaneously, numerous projects are developing decentralized exchanges (DEXs) that operate on blockchain technology. Unlike centralized systems, DEXs leverage blockchain’s core features—decentralization, transparency, and immutability—to enhance security and trust. Many innovative solutions are emerging in this space.
This article explains the foundational principles of blockchain-based exchanges and introduces three decentralized platforms: EtherDelta, Kyber Network, and JOYSO.
Article Structure
- Part 1 (this piece): Covers core concepts and centralized exchanges.
- Part 2: Explores decentralized exchanges and conclusions.
Note: This discussion focuses on Ethereum-based DEXs for ERC20-compatible tokens (e.g., EOS, OMG, BNB), excluding cross-chain exchanges for assets like BTC or XRP.
Core Concepts
Wallets
A crypto wallet is a private key paired with software/hardware that enables users to send/receive cryptocurrencies. The private key acts as a "password" to access funds—anyone holding it can control the wallet’s assets.
Signatures
Each wallet has a private key (kept secret) and a public key (shared on the blockchain). Files signed with the private key generate a signature, verifiable by others using the public key. Tampering with the file or key invalidates the signature.
Smart Contracts
A smart contract is self-executing code stored on the blockchain. Like wallets, they’re decentralized, transparent, and immutable. They can hold/release funds based on predefined rules.
Example: A contract holds 1 ETH and swaps it for 10 BAT when someone calls its trade() function.
Smart contracts often publish their source code for public auditing to ensure security.
Centralized vs. Decentralized Exchanges
Centralized Exchanges (CEXs)
- Control: Managed by a single entity (e.g., Binance, Coinbase).
- Risks: Vulnerable to hacks, require user trust.
- Process: Users deposit funds; trades occur off-chain.
Decentralized Exchanges (DEXs)
- Control: Operate via smart contracts; no intermediaries.
- Security: Funds remain in users’ wallets until trades execute.
- Transparency: All transactions are on-chain.
👉 Explore how DEXs revolutionize trading
FAQ
Q1: Are DEXs safer than CEXs?
A1: Yes, by design—users retain asset custody, reducing hack risks.
Q2: Can DEXs handle high trading volumes?
A2: Scalability varies; some DEXs use layer-2 solutions for speed.
Q3: What’s the main drawback of DEXs?
A3: Liquidity can be lower than CEXs, impacting trade execution.
Part 2 delves into specific DEXs like EtherDelta and JOYSO—stay tuned!
👉 Learn more about blockchain innovations
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