With cryptocurrencies stuck in the negotiations surrounding the regulations that governments and official bodies hope to impose on the industry, it is easy to lose sight of the guiding philosophy upon which the cryptocurrency is built.
When you read about cryptography, two of the adjectives that often precede it will be “peer-to-peer” and “decentralized”.
But what does this mean? And are the new regulations that governments around the world (including Australia) are trying to enforce, undermining the central philosophy of cryptocurrencies in the first place?
Peer to peer and decentralization
Cryptocurrency is the financial equivalent of a group of kids throwing a party and saying “no parents” on the invitations.
In 2008, the global financial crisis hit the world and was considered the worst economic crisis since the Great Depression of 1929.
Among a number of contributing factors was the issue of over-lending by banks and other institutions, whereby huge loans were made to low-income homebuyers that they ultimately had no means to repay.
In 2009, after it became clear that many of these same banks would not face any retaliation for their gross mismanagement, the first blockchain, Bitcoin, was created, which promises a system free of interference from third-party institutions. While the traditional economy is centralized, Bitcoin was to be completely decentralized, ungovernable, and democratic.
What is DEX?
A decentralized exchange is a peer-to-peer marketplace where transactions are peer-to-peer and free from any third-party interference.
DEXs fulfill an important part of the foundational aspects of cryptocurrencies by enabling financial transactions without banks, brokers, or any other third-party institutions whose old, big beaks stick to things.
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How does DEX work?
One of the main aspects that distinguishes a centralized exchange from a decentralized exchange is that DEX does not allow exchanges between digital currencies and cryptocurrencies. Instead, trade cryptocurrencies exclusively against other cryptocurrency tokens.
Take Coinbase, for example, which is one of the most popular centralized exchanges.
With Coinbase, a user can trade cryptocurrencies and vice versa. Central exchange users can also make more advanced moves, such as margin trading or placing limited orders.
On the other hand, DEX uses a proprietary algorithm (also known as a smart contract) to determine the prices of different cryptocurrencies against the other.
Furthermore, all transactions on the DEX are recorded on the central piece of technology upon which the cryptography is built: the blockchain rather than the internal database.
The best of DEX
According to CoinMarketCap, some of the top-ranked DEX indices include KlaySwap, with a 24-hour trading volume of $35 billion and UniSwap, with a 24-hour trading volume of $1.66 billion.
If you are focused on observing the broader coding space, then DEX is the place for you as it offers a virtually unlimited set of tokens.
Of course, with a wider net to catch more fish, be careful with some of the tokens out there, but enjoy the diversity that can only come through decentralized exchange.