Decentralized Exchanges
Written by Steve Miller
Introduction
Commonly referred to as DEXs, decentralized exchanges are trading platforms that do not custody user funds and allow trades to occur directly on-chain. DEXs arose in response to security and privacy concerns with the centralized exchanges historically used to buy and sell cryptoassets. Instead of needing to open an account, compromising their privacy via the KYC, Know Your Customer, process typically required by centralized exchanges. DEX users can securely exchange cryptoassets instantly and directly between their wallets, minimizing the risk of their coins being pilfered by hackers targeting centralized exchanges.
A challenge for DEXs is front running since orders are broadcast to the network and only settled when they are finalized in a future block. It is possible to pick off orders by placing the same trade and subsequently “front-running” the existing agreed upon trade by paying more for your transaction to be settled first.
A number of models exist to implement DEXs with a focus on aggregating liquidity so enough orders exist for transactions to be conducted.
0x built a protocol intended to set up a network of exchanges, referred to as relayers, able to interoperate to make and take orders across its network.
Uniswap implemented an automated market maker algorithm to ensure liquidity is always available to settle trades.
Kyber and Bancor employ the reserve method. Users place trades and then the network finds the most favorable counter party to transact with. Trades settle if the proposed counter party’s terms meet the users required minimum entered when proposing the trade.
Suggested Reading
Why Decentralized Exchange Protocols Matter - Fred Ehrsam
An Analysis of Decentralized Digital Currency Exchanges - TradeBlock
To find more content and up to date information, check out our board on Decentralized Exchanges
Additional Tools and Resources
A comprehensive list of decentralized exchanges (DEX) of cryptocurrencies, tokens, derivatives and futures, and their protocols distributed
Protocols for Decentralized Exchange
A comprehensive list of protocols for decentralized exchanges – evbots
Find and compare the best DEX rates for Ethereum based DEXs – Etherscan
Decentralized Exchange Order Tracker
List of DEX orders for Ethereum based DEXs – Etherscan
Top DEX pie chart and ranking for Ethereum based DEXs – Etherscan
Top data source for 0x based relayers – Craig Bovis
Subreddit for DEX related discussions