- The main advantages of Decentralized exchange development lie in better fund security, flexible custody, and a higher level of transparency.
- Decentralized exchanges do not require a license to commence operations and are complex to regulate.
- Centralized exchanges dominate the industry currently as they have high liquidity, provide a variety of features, and are easy to regulate.
With more focus shifting towards rendering freedom in daily operations, it has led to the emergence of Decentralized exchange development. It provides independence from the interference of third-parties and uses a peer-to-peer mechanism to hand over the control of handling funds to the users. Proxy tokens or assets will be created via the decentralized escrow system.
Decentralized exchanges are giving stiff competition to centralized exchanges which control most of the funds and trading volume in the industry. It has a strong future ahead as it can handle a countless number of assets that investors want to trade. Some of the leading decentralized exchanges in the market are WavesDex, Bisq, EtherDelta, Uniswap, and Bancor.
The benefits provided through Decentralized Exchange Development
- A higher level of trust is ensured for the traders than centralized exchanges as third-party control is eradicated.
- Every user can maintain the utmost privacy without disclosing his identity while carrying out his trading operations.
- There is no chance of server downtime as the hosting of decentralized exchanges is distributed via several nodes, preventing a single point of failure quite common in centralized exchanges.
- They facilitate cost-effective and faster transactions than centralized exchanges as there is no third-party authenticator to slow down the network and pocket a commission out of every transaction.
The shortcomings in Decentralized Exchange Development
- Most of the decentralized exchanges support only basic types of orders without having facilities for margin trading, take-profit, and stop-loss orders.
- They suffer from low liquidity and professional traders who deal in large-volume buying and selling of cryptocurrencies will not prefer to deal with decentralized exchanges.
- Some decentralized platforms such as Bitsquare expect all the clients to be online simultaneously for closing a deal successfully, leading to delays in settlement.
- They are relatively small in size and may struggle to operate if the trading volume and number of traders are huge. They will suffer from the pressure of scaling due to congestion on the Ethereum network and slow adaptation in the gas price.
- Since they do not accept fiat currencies by not complying with KYC (Know Your Customer) and AML (Anti Money Laundering) guidelines, it affects the operations of local traders especially those who do not own any cryptocurrencies.
- The smart contracts used in the automation of operations can suffer from bugs in the form of overflows, underflows, and reentrancy attacks, hampering its functioning.
- There is a risk of front-running as miners can preview each transaction and validate them, leading to chances of market manipulation.
- There is a need to establish more cross-chain exchanges to ensure that decentralized platforms are interoperable with each other.
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An overview of the operational intricacies of a Decentralized Exchange
- There is no formal sign-up process, and a functional wallet address is more than enough to get started.
- The buyer or the seller needs to choose a digital currency for trading and fix the quantity and the price to strike the deal.
- They can select the peer to peer mechanism for settlement after specifying the minimum value required and the time till which bidding for the assets will be allowed.
- The order book will contain details of the purchase cost, open requests, and finished requests.
- Once the bidding time expires, the smart contracts running in the background will automatically review all the proposals made and execute the best offer instantly.
- Once the seller confirms the receipt of cash, the specific amount of digital currency will be transferred to the buyer immediately.
The multi-pronged process involved in Decentralized Exchange Development
- Initially, the business requirements of the client will have to be gathered and an appropriate plan has to be prepared.
- Responsive design has to be developed keeping in mind the priority for user interface and seamless execution of functionalities.
- A blockchain network embedded with smart contracts would have to be kept ready for use.
- The exchange platform has to be tested several times and all the bugs have to be fixed.
- Post the completion of the testing process, the exchange can be deployed on the main network of the client for kickstarting trading operations immediately.
- After the deployment, periodic checks can be initiated to ensure the hassle-free running of the platform and any software upgrades can be issued if needed based on the feedback of the client.
The typical features needed in a Decentralized exchange
- Trading bots – Custom trading bots need to be integrated into the decentralized exchange for executing certain orders instantly through chat support in multiple languages.
- Support for multiple types of trading pairs – The leading cryptocurrencies and fiat currencies need to be available in the exchange to ensure the best trading experience.
- An attractive user interface – The user interface must be convenient to handle for amateurs as well as professional traders. The basic functions should be easily accessible with minimum navigation.
- An accurate matching engine – Since users will be in full control of their funds, on-chain order matching has to be accurate according to the requests raised by the different buyers and sellers. It has to ensure a completely permissionless ecosystem where the asset owner will dictate the terms and conditions to be followed for each individual trade.
The road ahead in Decentralized exchange development
Decentralized exchanges need more liquidity, scalability, and functionalities for mass adoption in the market. The benefits offered to outweigh its limitations. As more and more businesses implement blockchain technology in their operations, holders of digital assets would look to exercise more control and seek a higher level of security in their engagement with exchanges. Hence, decentralized exchanges will leave a strong mark on the financial world.
It offers a unique model as users can be in full charge of their assets without any middlemen, enabling the democratization of the cryptosystem. While it may not completely replace the role of centralized exchanges in the future, decentralized exchanges may strongly co-exist with centralized counterparts. Since centralized exchanges are facing the heat due to multiple hacking attacks indicating the vulnerability in its security aspects, decentralized exchanges will promise a faster, enhanced, secure, and efficient trading of cryptocurrencies.