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What are decentralized exchanges, and how do DEXs work?

DEXs, or decentralized exchanges, are peer-to-peer markets where cryptocurrency traders may conduct transactions without entrusting the administration of their assets to a middleman or custodian. Smart contracts, which are self-executing contracts written in computer code, are used to expedite these transactions.

DEXs were developed to do away with the need for any authority to monitor and approve deals executed within a particular exchange. Cryptocurrency trading can be done peer-to-peer (P2P) on decentralized exchanges. Peer-to-peer refers to a market place that connects cryptocurrency buyers and sellers. Since they are frequently non-custodial, users retain ownership of their wallet’s private keys. An enhanced encryption method that gives consumers access to their cryptocurrency is known as a private key. After entering their private key to access the DEX, users may immediately see their cryptocurrency balances. For those that value their privacy, they won’t be forced to give any personal information such names and addresses.

Automated market makers, for example, helped draw people to the decentralized finance (DeFi) area and greatly aided in its growth as innovations that addressed liquidity-related issues. Decentralized platforms expanded as a result of DEX aggregators and wallet extensions optimizing token prices, exchange fees, and slippage while providing customers with a better deal.

What are decentralized exchanges?

Smart contracts are used by decentralized exchanges to let traders place orders directly with one another. On the other hand, centralized exchanges are run by a central institution, such a bank, which is also engaged in the financial services industry and seeks to turn a profit.

The vast majority of trading volume in the cryptocurrency market is conducted on centralized exchanges since they are licensed organizations that guard users’ money and provide beginner-friendly interfaces. Even insurance on assets put there is offered by certain controlled exchanges.

A centralized exchange’s services are comparable to those provided by banks. Money may be moved around more easily because the bank protects its customers’ money and offers security and monitoring services that individuals cannot supply on their own.

Decentralized exchanges, in contrast, enable users engage with the smart contracts that power the trading platform directly from their wallets to conduct transactions. Traders are in charge of protecting their cash and are accountable for their loss if they commit errors like misplacing their private keys or transmitting money to the wrong locations.

Through decentralized exchange portals, the customers’ deposited money or assets are transformed into a “I owe you” (IOU) that may be freely exchanged on the network. A blockchain-based token with the same value as the underlying asset is what an IOU essentially is.

Top-tier blockchains that allow smart contracts have formed the foundation for the development of well-known decentralized exchanges. They are constructed directly on the blockchain since they are built on top of layer-one protocols. The Ethereum blockchain is the foundation for the most well-known DEXs.

How do DEXs work?

Every trade involves a trading cost in addition to a transaction fee since decentralized exchanges are constructed on top of blockchain networks that enable smart contracts and allow users to maintain custody of their cash. To utilize DEXs, traders essentially communicate with smart contracts on the blockchain.

Automated market makers, order books DEXs, and DEX aggregators are the three primary categories of decentralized exchanges. Through their smart contracts, all of them let users to transact directly with one another. Order books identical to those used by centralized exchanges were utilized by the first decentralized exchanges.

Automated market makers (AMMs)

To address the liquidity issue, a smart contract-based automated market maker (AMM) system was developed. These exchanges were partially inspired by a paper on decentralized exchanges written by Vitalik Buterin, a co-founder of Ethereum, which explained how to carry out trades on the blockchain using contracts holding tokens.

These AMMs rely on blockchain-based services known as blockchain oracles to determine the price of traded assets by gathering data from exchanges and other platforms. The smart contracts of these decentralized exchanges employ pre-funded pools of assets called as liquidity pools rather than matching purchase orders and sell orders.

Other users contribute money to the pools, and they are then eligible to receive the transaction fees that the protocol levies for carrying out transactions on that pair. To earn income on their cryptocurrency holdings, these liquidity providers must deposit an equivalent amount of each asset in the trading pair, a procedure called as liquidity mining. The smart contract powering the pool invalidates any attempts to deposit more of one asset than the other.

Traders can execute orders or earn interest in a permissionless and untrusted manner by using liquidity pools. Total value locked (TVL), a measure of the amount of money locked in these exchanges’ smart contracts, is frequently used to rank these exchanges since the AMM model has a drawback when there is insufficient liquidity: slippage.

Slippage happens when a platform’s lack of liquidity forces a buyer to pay above-market pricing for their order; bigger orders are more susceptible to slippage. Large orders are likely to experience slippage without substantial liquidity, which might prevent rich traders from utilizing these platforms.

A risk that liquidity providers also face is impermanent loss, which comes about as a direct result of depositing two assets for a particular trading pair. Trades on the exchange may reduce the amount of one of these assets in the liquidity pool if it is more volatile than the other.

Liquidity providers experience a transient loss if the price of the highly volatile asset rises while their holdings decline. The asset’s price may still increase, and transactions on the exchange may balance the pair’s ratio, thus the loss is temporary. The fraction of each asset held in the liquidity pool is indicated by the pair’s ratio. Additionally, trading commissions might eventually make up the loss.

Order book DEXs

Order books keep track of all open purchase and sell orders for certain asset pairs. Sell orders show that a trader is prepared to ask for a certain price to sell an asset, whereas buy orders show that a trader is eager to acquire or bid for an item at that price. The size of the order book and the market price on the exchange are determined by the difference between these values.

Request book On-chain order books and off-chain order books are the two categories of DEXs. When DEXs employ order books, open order information is frequently kept on-chain while user money are kept in their wallets. These exchanges could let traders to use money lent to them by lenders on their platform to leverage their bets. By enlarging the position size with borrowed money, which must be returned even if the traders lose their bet, leveraged trading raises the profit potential of a trade but also increases the danger of liquidation.

To give traders the advantages of centralized exchanges, DEX systems, which keep their order books off the blockchain, only settle deals there. Off-chain order books enable exchanges to operate more quickly and cheaply while ensuring that deals are performed at the pricing that consumers want.

These exchanges furthermore enable users to lend money to other traders in order to provide leveraged trading alternatives. Lenders are paid back even if traders lose their bets since borrowed money accrues interest over time and is guaranteed by the exchange’s liquidation process.

DEX aggregators

DEX aggregators utilize a variety of protocols and strategies to address liquidity-related issues. To reduce slippage on big orders, optimize swap fees and token prices, and provide traders with the lowest price in the shortest amount of time, these platforms basically pool liquidity from many DEXs.

Two additional important objectives of DEX aggregators are safeguarding consumers from the price effect and reducing the possibility of unsuccessful transactions. By utilizing a connection with certain centralized exchanges, some DEX aggregators additionally leverage liquidity from centralized platforms to improve user experiences while staying non-custodial.

How to use decentralized exchanges

A decentralized exchange does not require registration since you may connect with these platforms without even providing your email address. Instead, traders will require a wallet that is compatible with the network’s smart contracts. The financial services provided by DEXs are accessible to everyone with a smartphone and an internet connection.

A user must first choose which network they wish to utilize before using DEXs since there is a transaction charge associated with every trade. The following step is selecting a wallet that works with the chosen network and funding it with that wallet’s native coin. In a particular network, transaction costs are paid using a native token.

Interacting with decentralized apps (DApps), such as DEXs, is made simple by wallet extensions that let users access their money directly in their browsers. These must be created by the user or imported into a current wallet using a seed phrase or private key, just like any other extension. Password protection further tightens the security.

These wallets come with built-in browsers prepared to communicate with smart contract networks, and they may also feature mobile applications so traders may utilize DeFi protocols while on the go. Users can import their wallets from one device to another in order to synchronize them.

After selecting a wallet, it must be financed with the tokens required to cover the network’s transaction costs. These tokens, which must be purchased on controlled exchanges, are easily recognized by their ticker sign, such as ETH for Ethereum. Users just need to withdraw their tokens into their own wallets after purchasing them.

Avoiding sending money to the wrong network is essential. Users must thus withdraw their money to the proper account. Users who have funded their wallets can link them via a pop-up window or by clicking the “Connect Wallet” button in one of the top corners of the DEXs’ websites.

Advantages of using a DEX

Trading on decentralized exchanges can be costly, particularly when deals are made at a time when network transaction costs are high. Nevertheless, leveraging DEX platforms has a lot of benefits.

Token availability

Before listing tokens, centralized exchanges must independently inspect them to make sure they adhere to local laws. New projects will probably list on decentralized exchanges before being made available on their centralized equivalents since these exchanges may support any token created on the blockchain around which they are constructed.

While this may imply that traders may participate in initiatives as early as feasible, it also suggests that many frauds are published on DEXs. A popular exit scam is referred to as a “rug pull.” Rug pulls happen when a project’s team dumps the tokens that are meant to provide liquidity in the pools of these exchanges when their price increases, making it hard for other traders to sell.

Anonymity 

On DEXs, consumers’ identity is protected when they trade one cryptocurrency for another. Users are not required to go through the Know Your Customer (KYC) standard identification process, in contrast to centralized exchanges (KYC). KYC procedures entail gathering traders’ personal data, such as their complete legal name and a picture of an identification card provided by the government. DEXs thus draw a sizable population of non-identifiable individuals.

Reduced security risks

Using DEXs reduces the danger of hacking for seasoned cryptocurrency users who manage their assets because these exchanges don’t have access to their money. Instead, traders keep their money secure and only use the exchange when they want to. Only the liquidity providers may be at danger if the platform is compromised.

Reduced counterparty risk

When the other party to a transaction defaults on its contractual duties, it creates a situation known as counterparty risk. This danger is minimized by the fact that decentralized exchanges are built on smart contracts and operate without middlemen.

Users may immediately do a web search to see whether the exchange’s smart contracts have been reviewed and can base their judgments on the experience of other traders to make sure there are no additional dangers while utilizing a DEX.

Disadvantages of using DEXs

Despite the above benefits, decentralized exchanges have a number of disadvantages, including as the requirement for technical expertise to connect with them, the prevalence of smart contract vulnerabilities, and the unaudited token listings.

Specific knowledge is required

Cryptocurrency wallets that can communicate with smart contracts can be used to access DEXs. Users must comprehend security-related principles in order to keep their assets secure, in addition to knowing how to utilize digital wallets.

The appropriate coins for each network must be inserted into these wallets. Other money may become stranded without a network’s native token because the trader is unable to pay the transfer charge. The right wallet must be selected, and the right tokens must be added to it.

Furthermore, buying coins with less liquidity might make preventing slippage nearly hard, even for seasoned investors. On DEX systems, slippage tolerance frequently has to be manually changed for orders. Furthermore, correcting slippage requires technical knowledge, which some users may not have.

Without precise understanding, traders may make a variety of mistakes that might cost them money. A few instances of what may go wrong include withdrawing coins to the incorrect network, paying excessive transaction fees, and losing money due to temporary loss.

Smart contract vulnerabilities

Anyone can read the code for smart contracts on blockchains like Ethereum since it is publicly available. Moreover, trustworthy companies that aid in code security evaluate the smart contracts of sizable decentralized exchanges.

Humans make mistakes. As a result, exploitable defects still have a chance to elude audits and other code evaluations. Even worse, auditors might not be able to predict brand-new vulnerabilities that might lose liquidity providers their tokens.

Unvetted token listings

A decentralized exchange allows anybody to add a new token and add liquidity by pairing it with other tokens. Investors may become vulnerable as a result of frauds like rug pulls, which trick them into thinking they are purchasing a different token.

Some DEXs limit these risks by requesting that users confirm the tokens’ smart contracts before purchasing them. While this approach serves the needs of seasoned users, it brings up special knowledge issues for others.

Before purchasing, traders should strive to learn as much as they can about a token by reading its white paper, becoming a member of its online community, and searching for prospective project audits. Due diligence of this kind helps prevent frequent scams where criminals prey on unwary people.

Decentralized exchanges keep evolving 

Although the first decentralized exchanges originally surfaced in 2014, these platforms didn’t really take off until decentralized financial services based on blockchain gained popularity and AMM technology enabled DEXs overcome their earlier liquidity issues.

These platforms struggle to enforce Know Your Customer and Anti-Money Laundering checks because no one organization verifies the kinds of data that are typically provided to centralized platforms. However, regulators could try to establish these controls on decentralized systems.

Since these platforms still need users to sign blockchain messages to transfer money off of them, even those that do allow user deposits are exempt from the regulations that apply to custodians.

These days, decentralized exchanges allow users to lend money to earn interest passively, borrow money to leverage their holdings, or supply liquidity to earn trading commissions.

These systems’ reliance on self-executing smart contracts may lead to the development of further use cases in the future. Flash loans are an example of how innovation in the decentralized financial sector may provide goods and services that were previously impossible. Flash loans are defined as loans accepted and repaid in a single transaction.

Explain dropshipping 2019 and how to get started

Explain dropshipping 2019 and how to get started

In the past few days, an article was published on e-commerce , in which I dealt with its definition, features, and the most important components on which it is based, after which a detailed guide was published on the steps for  creating a professional online store . Today, in the context of covering the idea of ​​creating a business online from all sides, we will talk about drop shipping.

Recently, the term drop shipping has become very popular, and it has become one of the important types of business on the Internet, and there are many who have achieved great successes through it, including many from Arab countries.

Note: In the article Steps to Create a Professional Online Store, I explained everything related to creating an online store, you should return to this article and read it, because here I will not repeat what he came up with, and I will only care about what is related to drop shipping in particular.

The article can be accessed from the link below:
Steps to create an online store

What is drop shipping?

Drop Shipping: a term made up of two words, but there are many who refer to it as one word and write this like Dropshipping, and its literal Arabic translation means dropping the shipping process, and drop shipping is a type of online business that belongs to the world of e-commerce, and in which the online store does not keep its stock, but Once the buyer makes a purchase order from one of the products offered in the online store, the store accordingly makes a purchase order from a third party, and the third party (wholesaler, other large store or factory) ships the product directly to the buyer.

From the previous explanation, it is clear that your online store in the case of Drop Shipping is just an intermediary, between the customer (buyer) and the wholesaler or factory, and therefore the profits here are the difference between the sale price and the purchase price.
Here is a picture showing the idea of ​​Drop Shipping in a simple way:

The most important features of drop shipping

In our topic today, we will not directly talk about the defects or advantages of the routes shipping, but we will talk at this point specifically about the features that determine the shape and nature of this type of business, and by reading these features you can understand the obstacles that may face you, and also understand the features in your work in the paths Shipping.

You don’t necessarily have to own an online store to start shipping

There are many marketers who use well-known online stores, as an alternative platform to display products, for example you can use the Ebay store as a platform to display products from Ali Express by way of a dropshipping method, so when an eBay visitor views your product and makes a purchase order, you make a purchase order from Ali Express, The product arrives at the buyer’s address.
You can also use social media as a platform to display products.
Note: In our topic today, we talk about routes, in particular, by creating an online store.

In drop shipping, your store does not play a major role in the trade process, but is merely an intermediary.

The main pillars that underpin trade are: the factory that performs the production process, the wholesaler who buys from the factories in order to resell to the retailer, and the retailer that sells directly to the consumer (this represents most types of online stores in general).

With your business in drop shipping, your online store is just a channel that connects the consumer to the merchant or factory that provides the drop shipping service.

The shipping method does not need a lot of capital

As a dropshipping store owner, you will purchase from the wholesaler after you receive the purchase order from the consumer, here you do not have to keep any stock, this will not make you need a large capital to start, but this of course does not mean that there are expenses related to creating the online store, And marketing expenses you must keep in mind.

Drop shipping is a completely hidden process for the buyer

Your own store is the interface that the buyer will deal with, and it is assumed that the product reaches the buyer and has the name and logo of your store on its cover. The buyer in the drop shipping will not know anything about the wholesaler who owns the product, so the sale process for him is from your store that no one else knows, and if you encounter any problem, he will resort to you to solve it.

You don’t necessarily have to rely on a single source of products

In the drop shipping, you can display thousands of products from completely different sources, this is a very important feature, because the diversity of products will attract more buyers and help to achieve more sales.

But on the other hand, the diversity of product sources may be the cause of the buyer’s discomfort (for example: if the buyer buys two products at the same time, but from two different sources, this will make him logically expect them to arrive at the same time, because he assumes that they are from your store directly). As a dropshipping store owner, you should expect and prepare for it.

Dropshipping made the e-commerce process very easy and fast

The simple idea behind dropshipping allows anyone with some simple skills to enter the world of e-commerce. This represents an advantage for you, but it is an advantage for all of your competitors as well, and then this leads to a significant increase in the level of competition in drop shipping. This inevitably reduces the profit margin to get good sales.

What do I need to start drop shipping?

In this part, we will discuss together, the most important elements you need to start your business in an actual way in shipping.

1- Building an online store

There are many solutions and options available for creating an online store, and these solutions differ among themselves according to cost and ease, but any of them can be relied upon to create an online store for the purpose of Drop Shipping. In the Steps to Create an Online Store article, we covered these options in detail.
Here is a brief summary of each of them:

Programming companies
This represents the most expensive option and the slowest implementation, it is not suitable for beginners, but it is the ideal solution for large stores that need unique specifications and features.

WordPress and WooCommerce
is the cheapest option, it needs some skills to deal with WordPress and add WooCommerce, but with some time and effort anyone can handle it with ease. And because WordPress is an open source program, you will find tons of explanations and resources for learning anything of its own.

Specialized platforms Specialized
platforms represent an integrated solution for creating an online store. They are platforms that provide you with all the features and features you need in exchange for an amount you pay periodically (every month).

This option is the most widely used and widespread in the world of shipping, and it is the easiest solution ever, as these platforms literally provide you with everything you need, and they also provide a support service to help when needed.
One of the most famous of these platforms is the global Shopify platform  , and there is a specialized Arab platform called  Expand Cart .

2- Contracting with a dropshipping wholesaler (s)

This is a very sensitive and important point. There are a lot of suppliers that operate in the dropshipping method, and they might be wholesalers, supermarkets, or factories.

You have to determine your choices here precisely and according to your own circumstances, including the target market (the country in which you want to sell your products), and whether the supplier allows the products to be shipped to them or not, and also includes the nature of the products that you want to sell, as well as the prices provided by the suppliers and the extent of their suitability with you.

Here is a list of the most important sites that provide drop shipping service for stores:

aliexpress (the largest wholesale e-commerce site, with it you will find thousands of suppliers in all types of products that
enable the dropshipping system) Tinydeal (a Chinese site specializing in the shipping of electronic devices and smart phones)
Dropshipdirect (a site specializing in the shipping of thousands of suppliers and tens of thousands of products)
Tmart (site has various products of shoes, clothes, accessories and devices Alaketronah..k)

3- Setting the means of payment for buyers and suppliers

In the case of working in the drop shipping business, you have to set the method of payment for the buyers from your store, and you must also specify the method with which you will pay the suppliers. At this point , there are also a lot of options, the most important payment by Paypal (via Paypal is ), it is on the one hand means payment is acceptable to the majority of suppliers, and on the other hand you can easily adjust it to your store mail in order to be a way to receive money from buyers.

4- Create a marketing plan and build a brand for your store

Your success in drop shipping depends largely on your success in marketing, and working to get your store known among potential buyers. This includes creating advertising campaigns on social media and on Google Ads. Also, it should be noted here that marketing begins in terms of setting prices, carefully targeting the most appropriate market … etc.

In this regard, you should return to the subject of e-marketing , because of what it has with information that will help you market your store.

My goal in maza-dat is always to provide real benefit to the visitors, the website followers know that well. In this article, I presented an explanation of the idea of ​​shipping, and on what basis it is based, and explained in the points what you need to start with.

But success in shipping routes is based on many elements and contains many details, so I will conclude my topic here, with a group of the most important sources and courses to learn routes shipping, for everyone who really wants to start in this field with a thoughtful and deep knowledge.

The most important courses and resources for learning routes shipping

An integrated course in Arabic on YouTube (from Amazon to eBay without owning a store)
http://bit.ly/2xSwgMG

An integrated course on Dropshipping ( via AliExpress and Shopify ). This course is one of the best drop shipping courses on the Internet. (This course is now available on the Udemy platform for only $ 19.99.)
Today’s date is August 19, 2019, and the price may vary in the future.
http://bit.ly/33EAsOw

A guide of 11 lessons provided by  Shopify
http://bit.ly/2xRPl19

Free book provided by the Oberlo platform
http://bit.ly/2xOkzq5

Conclusion

The routes shipping is a relatively new field for us as Arabs, I tried on this subject to present a useful guide for everyone seeking to start in this field.

Drop shipping really represents a great opportunity for everyone seeking to create their online store, without going into the complexities and costs of owning a stock.

The Arab market is constantly growing, and the habits of buying through the Internet are on the increase. Do not be passive and spend your life wishing to enter this field, but start taking practical steps today to achieve your dream.
If you are interested in the idea of ​​selling online, and want an easy and free way to test your ideas, then you should try  Facebook Marketplace

Explain dropshipping 2019 and how to get started Explain dropshipping 2019 and how to get started Explain dropshipping 2019 and how to get started Explain dropshipping 2019 and how to get started

What Is a DEX (Decentralized Exchange)?

DEFINITION

Without the use of a custodian or centralized middleman, users can trade crypto assets through blockchain transactions using a decentralized exchange (DEX).

Users can trade cryptocurrencies on a DEX (decentralized exchange) in a non-custodial setting without the requirement for a middleman to handle the transfer and custody of money. DEXs use blockchain-based smart contracts to replace traditional middlemen, such as banks, brokers, payment processors, and other organizations, to enable the exchange of assets.

DEXs provide total transparency into the movement of funds and the processes supporting exchange, in contrast to typical financial transactions, which are opaque and carried out through middlemen that provide very little insight into their actions. DEXs also lessen counterparty risk and potentially lessen systemic centralization problems in the bitcoin ecosystem since user money don’t transit via a third party’s cryptocurrency wallet while trading.

Due to its permissionless composability, DEXs are an essential “money LEGO” upon which more complex financial products may be constructed. DEXs are a cornerstone of decentralized finance (DeFi).

How Does a DEX Work?

There are several DEX designs, and they all have advantages and disadvantages in terms of feature sets, scalability, and decentralization. Order book DEXs and automated market makers are the two most popular varieties (AMMs). Another popular type is DEX aggregators, which search across several DEXs on-chain to get the best pricing or lowest gas cost for the user’s intended transaction.

The high level of determinism attained by employing immutable smart contracts and blockchain technology is one of the key advantages of DEXs. DEXs carry out deals utilizing smart contracts and on-chain transactions as opposed to centralized exchanges (CEXs), like Coinbase or Binance, which use their own matching engine to enable trading. DEXs also give customers the option to trade while maintaining full custody of their money in self-hosted wallets.

Network fees and trading fees are the two main types of expenses DEX users are normally expected to pay. While trading fees are paid by the underlying protocol, its liquidity providers, token holders, or a mix of these organizations as stated by the protocol’s architecture, network fees relate to the gas cost of the on-chain transaction.

An end-to-end on-chain infrastructure with permissionless access, zero single points of failure, and decentralized ownership across a community of dispersed stakeholders is the goal of many DEXs. This often implies that a decentralized autonomous organization (DAO), made up of a community of stakeholders, governs protocol administrative powers by voting on important protocol choices.

It is challenging to maximize decentralization while maintaining the protocol’s competitiveness in a crowded DEX market since the DEX’s core development team often has more knowledge about key protocol decisions than a dispersed group of stakeholders. To boost censorship resistance and long-term resilience, many DEXs choose a decentralised governance structure.

Order Book DEXs

An essential component of electronic exchanges is an order book, which is a live collection of open buy and sell orders in a market. The internal operations of an exchange use order books to match buy and sell orders.

On-chain order book in full Due to the need that every interaction inside the order book be put on the blockchain, DEXs have historically been less prevalent in DeFi. Either far higher throughput than the majority of current blockchains can manage is required for this, or network security and decentralization must be seriously compromised. Early order book DEXs on Ethereum as a result had poor liquidity and unsatisfactory user interfaces. Still, these exchanges provided a convincing demonstration of how a DEX might support trade using smart contracts.

On-chain order book exchanges have become more practical and now see a lot of trading activity thanks to scalability innovations like layer-2 networks like optimistic rollups and ZK-rollups as well as the introduction of higher-throughput and app-specific blockchains. Hybrid order book designs, in which the management and matching of orders take place off-chain but trade settlement takes place on-chain, have also grown in popularity.

A few well-known order book DEXs include Serum, Loopring DEX, 0x, and dYdX.

Automated Market Makers (AMMs)

The most popular sort of DEX is one with automated market makers since it allows for quick liquidity, democratized access to liquidity, and—in many cases—permissionless market creation for any token. A money robot in essence, an AMM is constantly ready to propose a price between two (or more) assets. An AMM uses a liquidity pool instead of an order book where users may trade their tokens, with the price set by an algorithm depending on the percentage of tokens in the pool.

AMMs allow rapid access to liquidity in markets that could otherwise have reduced liquidity since they can always quote a price for a user. A willing buyer must wait for their order to be matched with a seller’s order in the case of an order book DEX; even if the buyer puts their order to the “top” of the order book near to the market price, the order may never execute.

In the case of an AMM, a smart contract controls the exchange rate. Users may instantly access liquidity, and liquidity providers—those who deposit funds into the liquidity pool of the AMM—can profit passively from trading commissions. AMMs have seen a huge increase in the number of new token launches thanks to the combination of rapid liquidity and democratized access to liquidity provision. This has also allowed for the development of novel designs that concentrate on specific use cases, such as stablecoin swaps. Read this page on how AMMs function for a more thorough investigation of AMMs.

AMMs might be used to support exchanges of NFTs, tokenized real-world assets, carbon credits, and much more, even though the majority of existing AMM designs focus on cryptocurrencies.

Bancor, Balancer, Curve, PancakeSwap, Sushiswap, Trader Joe, and Uniswap are a few examples of well-known AMM DEXs.

What Are the Benefits of Decentralized Exchanges?

DEX trades contain strong guarantees that they will execute precisely as the user intended, free from the interference of centralized parties, because they are made possible by deterministic smart contracts. DEXs offer robust execution assurances and enhanced transparency into the underpinnings of trade, in contrast to the opaque execution techniques and possibility for censorship inherent in traditional financial markets.

DEXs lower counterparty risk because there are no custodians involved and consumers may participate using self-hosted wallets. By lowering the amount of cash concentrated in the wallets of a limited number of centralized exchanges, DEXs can help lessen some of the systemic risks associated with the blockchain sector. Prior to its unexpected closure and the loss of hundreds of thousands of bitcoins, the Mt. Gox controlled exchange managed a sizeable part of all Bitcoin trade volume in 2014.

DEXs contribute to wider financial inclusion. Accessing a DEX’s smart contracts just needs an Internet connection and a suitable self-hosted wallet, unlike certain user interfaces that have restricted access depending on a user’s location or other criteria. In contrast to a centralized exchange, the onboarding procedure for a DEX is simple and nearly immediate because users can sign in easily using their wallet address.

DEX Risks and Considerations

Through better execution guarantees, more transparency, and permissionless access, DEXs have democratized access to trade and liquidity provision. DEXs do, however, come with a number of dangers, including but not limited to:

• Blockchains are thought to be quite safe for carrying out financial transactions, however there is a smart contract risk. The degree of expertise and experience of the team that created a smart contract does, however, have an impact on the code quality of the project. DEX users may experience a financial loss as a result of smart contract faults, hacks, vulnerabilities, and exploits. By using peer-reviewed code, good testing procedures, and security audits, developers may reduce this danger, but they must always exercise caution.
• Liquidity risk: Although DEXs are gaining popularity, certain DEX marketplaces have inadequate liquidity, resulting in significant slippage and a bad user experience. Significant sections of trading activity are still undertaken on centralized exchanges, which frequently results in reduced liquidity on DEX trading pairs because to the network effects of liquidity, which operate as follows: high liquidity draws more liquidity, low liquidity attracts less liquidity.
• Frontrunning risk—Because blockchain transactions are public, arbitrageurs or bots seeking to extract the most extractable value (MEV) from unknowing users may attempt to frontrun DEX deals. These bots attempt to take advantage of market inefficiencies by paying higher transaction fees and minimizing network delay, just like high-frequency traders do in traditional markets.
• Risk associated with frontrunning: Because blockchain transactions are public, arbitrageurs or bots seeking to extract the most value possible from unaware users may attempt to frontrun DEX deals. These bots aim to take advantage of market inefficiencies by optimizing network latency and paying higher transaction fees in order to profit from the DEX transactions of regular users, just like high-frequency traders do in traditional markets.
• Even though many DEXs strive to increase their decentralization and censorship resistance, centralization points may nevertheless exist. These include, among other things, the use of subpar token bridging infrastructure, the hosting of the DEX’s matching engine on centralized servers, and administrative access granted to the DEX’s smart contracts by the development team.
• Network risk—Because a blockchain facilitates the exchange of assets, utilizing a DEX may be prohibitively expensive or completely impractical if the network encounters congestion or outage, leaving DEX users vulnerable to changes in the market.
• Token risk—Since many DEXs allow anybody to develop a market for any token, the likelihood of purchasing a subpar or harmful token may be higher than it would be on a controlled exchange. Users of DEX should think about the dangers of taking part in projects in their early stages.

In addition to the aforementioned, some users could find the idea of having complete control over their private keys to be unsettling. One of the key advantages of the Web3 vision is having complete control over one’s assets, yet many users would choose to entrust a third party with that responsibility. While accessing a complex ecosystem of open-source financial services, more users may be able to take advantage of the advantages of preserving total control over their assets by adhering to proper security and key management procedures.

What is a DEX?

What are decentralized exchanges, and how do DEXs work?

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