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What is a Decentralized Exchange and how does it work?

As we have already seen in previous publications, within the Cryptocurrency ecosystem there are various types of electronic commerce platforms, where we can acquire our first Cryptos or simply sell or exchange for another digital asset.

Some of these platforms have a wide variety of extra services that make them very attractive for Cryptocurrency enthusiasts, to the point that even just a few platforms concentrate almost 70% of the Crypto transactions that are carried out globally, but this popularity does not mean that these platforms are alien to centralization, because as we have already seen, within the ecosystem of digital assets we can find centralized blockchain networks such as Ripple XRP and decentralized blockchain networks such as Bitcoin.

In this way, as we explore the different tools and services in the Crypto world, we will see that this pattern repeats itself, and this time we will talk about decentralized electronic trading platforms for Cryptocurrency.

What is decentralization in Cryptocurrencies?

When we talk about decentralization today, it is inevitable not to think about Cryptocurrencies, since it is one of the pillars that Satoshi Nakamoto, the creator of Bitcoin, left us in 2009; This concept is very important within the Crypto community since it is the opposite of what the traditional financial system follows.

To talk about decentralization, it is necessary to know its counterpart (Centralization), and if we look carefully we can see that the entire modern financial system is centralized, each country has its central bank, which is the entity in charge of managing and controlling the financial and monetary flow within said country. And many will wonder what’s wrong with this? Well, for Nakamoto this simple fact has been to blame for innumerable financial crises in various countries around the world.

This is why at the time of devising Bitcoin and what would later evolve into a complete ecosystem, one of the main pillars was sought to be the decentralization of any system or service, this in order to prevent a group or a single agent from having control of the entire Crypto financial system and thus take advantage of it.

With decentralization, it is about seeking a common good since the same users of a system or platform are in charge of making said system work, this through a consensus that is sometimes enhanced with smart contracts.

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Decentralized Exchanges

As we were able to see earlier, decentralized services and platforms are not a strange concept within this ecosystem at all, on the contrary, it is normal for most of these services or platforms to seek total or partial decentralization.

This is why as the Crypto market evolves we can see more and more decentralized Crypto e-commerce platforms appear. All of this due to the development of blockchains, powered by smart contracts and supplemented by Dapps (Decentralized apps).

Thanks to all the functionalities mentioned above, we can use decentralized exchanges, which basically work and operate in a very similar way to normal Cryptocurrency exchanges such as Binance or Coinbase except for some substantial differences.

In decentralized exchanges we can see that the process of accessing the platform’s services is not as complicated as in a centralized exchange, since in most of these it is mandatory to carry out an Identity Verification Process such as KYC, which for some goes against the right to privacy; Regarding the exchange dynamics, we can see that it is no longer necessary to use an order book as it is used in normal platforms, instead a system of intelligent contracts is used that controls liquidity within each group or pair created within the platform.

It should be noted that despite not having an order book, the mathematical algorithms that control the liquidity of these platforms are very reliable, so much so that the volume of trade within decentralized exchanges is increasing.

Perhaps many have already heard about some of these platforms, but below we will name some of the most important decentralized exchanges by market volume.

  • Uniswap
  • dYdX
  • PancakeSwap
  • SushiSwap
  • DODO
  • MDex

Within this list we can find Uniswap, which is one of the most successful decentralized exchange cases and which has its own management token, with almost a billion daily transactions within the platform, it is one of the most used platforms of the Crypto community.

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En teoría ninguno modelo es mejor que el otro, simplemente están diseñados para un tipo de usuario en específico, dentro de cada tipo de exchange podemos encontrar personas que necesitan una opción confiable de compra o adquisición de tokens y criptomonedas, más que el tipo de exchange la diferencia radica en los servicios que pueda brindar la plataforma.

Un exchange descentralizado es tan seguro como uno que no lo es, y al igual que uno centralizado posee sus riesgos de seguridad sin embargo son muy seguros, y en ocasiones la mayor amenaza de un usuario en este tipo de plataformas es él mismo, ya que no cumple con los requisitos mínimos para mantener su cuenta segura y pueden llegar a ser víctimas de hackeos o fishing.

Unas de las principales ventajas de este tipo de plataformas es que sus comisiones son un poco más bajas que en otras plataformas, también podemos encontrar que no corremos el riesgo de estar a merced de juntas directivas que puedan llevar el destino de la plataforma a un lugar incierto.

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