What is a Decentralised Exchanges and Why are they Outshining Centralised Exchanges?
Summary
It is an exciting time in crypto right now. Huge advances are being introduced regarding the rise of blockchain technology and decentralised exchanges. Ardana is at the forefront of this change with pioneering technology that provides exceptional security and sustainability to decentralised applications.
This article takes a close look at decentralised exchanges and their advantages, along with what we can expect from Ardana’s decentralised exchange launching on Cardano at the end of the year.
What are Decentralised Exchanges?
Decentralised exchanges are the foundation of decentralised finance. A decentralised exchange (DEX) is a peer-to-peer marketplace (P2P) that allows platform users to trade cryptocurrency without the need for an intermediary. With transactions passing through a decentralised exchange, a blockchain or distributed ledger replaces the traditional third-party intermediaries (e.g. banks, online payment gateways, etc).
For a DEX to run smoothly and efficiently, several conditions must be met:
Sizable User Base of Buyers and Sellers
To protect the exchange from manipulation and ensure high liquidity, there must be a decent amount of users trading on the platform.
Fast Transactions
To avoid slippage, transactions need to be executed quickly. Prices can shift within minutes of entering a trade, traders must be confident that their orders will be fulfilled in the least amount of time.
Minimum Number of Trading Pairs
To protect the market against arbitrage, there should be a minimum number of trading pairs as this can have negative consequences in the long term.
Easy to Use Interface
Although each individual will have different expectations on what constitutes an easy-to-use interface, the typical person will want to see a straightforward design when it comes to entering trades.
Scalability
Exchanges must be equipped to handle large volumes of trades without any risk of bringing the platform to a grinding halt in case of overwhelm.
The Different Types of DEXs
To gain a better understanding of how DEXs function, we must first distinguish between two forms of decentralized exchanges:
Order Book DEX
An off-chain order book DEX allows for trading by combining order books built off a blockchain with on-chain settlement. Traders gain the benefits of both decentralised and traditional trading. An off-chain DEX uses a peer-to-peer order book to execute trades. To remain decentralised this type of DEX uses special mathematical algorithms — zero-knowledge proofs that allow smart contracts to verify off-chain calculations before recording deals on a blockchain.
Liquidity Pool DEX
Regarding a liquidity pool DEX, there is no need to wait for any orders to complete a transaction. Instead, traders can use a liquidity pool. A liquidity pool is made up of tokens (typically a pair of tokens, but exceptions exist) that allows traders to simply place tokens they wish to sell in the pool and withdraw the same amount of tokens they would like to buy. The technique is straightforward, and a smart contract can usually complete it in a single blockchain transaction. Liquidity pool DEXes have this benefit over order book DEXes, which is why they are so popular.
What is the Difference Between a Centralised Exchange and a Decentralised Exchange?
Centralised exchanges operate through businesses that provide crypto and fiat ramps. These are powered by software that’s known as a trading engine. Centralised exchanges are normally in charge of deciding which currency pairs are available for trade and can add or remove them at any time. The operators behind a centralised exchange may also remove features or completely shut down the platform whenever they see fit. On the other hand, a decentralised exchange such as the XRPL DEX is always running.
Advantages of Trading on a Decentralised Exchange
“Not Your Keys, Not Your Coins”
If you are active in the crypto community you have most likely heard this phrase before. It highlights the importance of being in control of your keys and not allowing them to be held by a third party.
Why is this important? When cryptocurrency is transferred to an individual, it is sent to the “public key”. Users will also have a “private key” that is linked to their public key. If another user were to gain access to the private key, they would automatically have access to the funds available on the public key. On a centralised exchange, the exchange owns the private key and can determine the amount that may be withdrawn and may also take a percentage of any crypto transactions. The same applies to crypto wallets that do not provide users with a private key.
Individuals who own their private key are better protected from malicious actors and are in total control of their funds.
One of the biggest advantages of trading on a DEX platform is that the users will remain in possession of their private keys as the platform is non-custodial. Unlike centralised exchanges, also, DEXs do not store a user’s funds or their data (no KYC required) on their servers and only serves as a platform to find matches with other users to buy and sell.
Lower Fees
Self-executing smart contracts are used to run decentralised exchanges. DEXs have a modest cost structure, although prices change depending on the usage of the network. The fees are still significantly less than the costs associated with centralised alternate data centres.
Easy to Manage Assets
Decentralised exchanges are designed to provide individuals with complete control over their assets. Users can trade and use the funds to transact on another site, transfer to another user, or buy online (most decentralised exchanges are e-commerce friendly). The payment processes are more efficient compared to centralised exchanges where deposits and withdrawals take longer.
Danaswap and Curve Finance
Ardana is building a decentralised exchange, Danaswap, that is to launch at the end of the year. Danaswap is an automated market maker (AMM) DEX for stable multi-asset pools built on the Cardano blockchain. Its invariant curve formula can facilitate a whopping 50–100 times capital efficiency. AMMs price cryptocurrency assets in liquidity pools on the exchange using smart contract-enabled algorithms, eliminating the need for counterparties.
Curve Finance is also a decentralised exchange that operates on the AMM model. Curve trades stablecoins only on Ethereum, Danaswap goes further than this. Danaswap provides liquidity for USD stablecoins and stable assets and will eventually facilitate foreign exchange on Cardano.
Both Curve and Ardana are community governed, the vote on both platform, each platform’s tokens must be converted to vote-lock (tokens are then no longer tradable). In terms of rewards, Curve’s liquidity pool rewards and incentives are paid in CRV to LPs based on the size of poolshare. With Danaswap, rewards are earned by: staking DANA tokens early to create exDANA, providing liquidity, and by depositing dUSD in the Ardana Savings Module.
Along with a generous fees and rewards system, Ardana also offers a savings module. The Ardana Savings Module allows dUSD holders to deposit funds and earn the Ardana Savings Rate, which is a rate of interest. The Ardana Savings Module uses a portion of the platform fees to manage the supply and demand of dUSD by increasing and reducing the Ardana Savings Rate.
Curve Finance has been described as the “ultimate DeFi lego block” because of it’s cheap, low-slippage stablecoins. Curve offer an impressive DEX, but Ardana takes this one step further with more interesting features and extra ways to make and save money on the platform.
Conclusion
Decentralised exchanges are an exciting addition to DeFi and are steadily overtaking centralised exchanges in terms of popularity. DEXs are typically geared towards more experienced users because they are more complex than centralised exchanges. Although there are large communities of DEX users, there is a higher degree of responsibility attached to the user as they are fully responsible for their own money. On the flip side, this is quite reassuring from a security standpoint.
One of the best features of a decentralized exchange is that users enjoy complete ownership over their digital portfolios and are free to share this information with potential buyers. As there are no central servers, each user is solely responsible for the security and privacy of their transactions.
In a world that is becoming more concerned about data, DEXs provide anonymity and grant users full access to their private keys. There is also no authentication procedure.
If you are seeking a secure exchange with more advanced and interesting features, a centralised exchange is certainly the way to go.
Ardana
Ardana is an on-chain asset-backed stablecoin protocol and decentralized exchange stable asset liquidity pool built on Cardano. The stablecoin is overcollateralized with on-chain Cardano native assets facilitating borrowing and the decentralized exchange allows for highly capital efficient trading between stablecoins and identical assets with low-risk income from fees for liquidity providers.
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