Are Decentralized Exchanges the Future of Liquidity?
If you’re reading this, then you’ve probably used a cryptocurrency exchange before. Buying Bitcoin – or any other cryptocurrency asset for that matter – requires you to use a crypto exchange for your first purchase. The exchange you used, however, was likely a centralized one.
Therein lies one of the major ironies of the cryptocurrency environment – for all of its focus on decentralization, the means for purchasing it remains heavily concentrated and hosted by Amazon AWS clouds. The upshot is that cryptocurrency developers and project backers are well aware of the contradiction therein, and are quickly progressing toward a new dawn.
That new dawn is the decentralized exchange.
What is a decentralized exchange (DEX)?
Decentralized exchanges are similar to their centralized counterparts in that you use them for trading. The big difference, however, is that when using a DEX, you’re trading assets directly with other peers. Peer to peer trading in this manner is pretty similar to other forms of P2P trade you may have used in the past like SoulSeek, Napster, and BitTorrent.
When using a DEX, your cryptocurrency wallet is connected to the exchange API. If you’re looking to swap BTC for ETH, you’ll go to the ETHBTC market and check the order book. This step is almost exactly the same on a centralized exchange.
Once there, you can create a buy order for ETH at the price you’re willing to pay, or you can simply market buy. When the trade is done, it means that your order was filled by a peer just like yourself on the trade’s flipside.
However, this isn’t the only shape that a DEX can take. Instead of merely mirroring a centralized exchange order book and all, a DEX can operate in the background of any instance requiring value exchange.
Let us explain.
Decentralized exchanges seamlessly swap assets
Now, let’s imagine that it’s ten years from now, and you’re using a decentralized marketplace to buy from a merchant. The merchant wants to receive ETH, but you want to pay in BTC. Seems problematic, doesn’t it? But in reality, situations like this are figured out in a cinch.
That’s because the marketplace’s wallet app is connected to a DEX API, which allows it to seamlessly swap assets in the background of a transaction. When you click ‘buy’ on the item and checkout, you’ll get an amount in BTC to pay. Once you click ‘pay,’ the wallet will connect to the DEX, exchange for the equivalent amount in ETH, and send that to the merchant’s wallet.
Everyone walks away happy – you’ve got your product and paid with BTC; the seller sold a product and was paid in ETH.
Seamless swaps such as this are possible amongst an even wider variety of assets than just cryptocurrencies using DEX technology. Soon, you’ll swap rewards points, loyalty points, travel miles, gift card values, and other siloed forms of currency with other peers using decentralized exchange technology.
Sounds pretty neat, right? Decentralization certainly does make the future a cooler place.