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How Decentralized Exchanges (DEXs) Work?

By Laxmikant Khanvilkar

The new buzz word that’s spreading like wildfire is: Decentralized. It will soon replace traditional, old slow, and less trustworthy way of interacting with each other.

The decentralization process, capable of handling huge databases, is finding its way into all parts of the traditional banking system, including exchange, contract signing and controlling money.

Let’s understand its effective implementation into the development of decentralized exchange and how it relates to the new, decentralized financial system and benefits thereof.

Definition of Decentralized Exchange

Decentralized exchange (DEX) is a part of decentralized finance (DeFi), a system that enables usual banking processes, but without an intermediary or an authority. The whole system works on cryptocurrencies and is supported by decentralized smart contracts.

Smart contracts are not like the normal ones, written and signed in the bank, for the bank to keep. They are transparent, direct, and offer a safe ground for direct transactions between users. They are preserved in blockchains, long and layered chunks of data that are hard to modify and break into, making them a safe place to store data.

Blockchains are independent masses of data, which maintains continuously growing list of ordered records – called blocks, that need to be connected to make inoperability possible. That’s where connecting blockchain networks kicks in. Often called bridging, this system allows users to safely lend, borrow and spend money in form of cryptocurrency.

When it comes to safety of these systems, there is usually no need to be worried. Blockchain technology is built on the principles of cryptography.

Personal data isn’t stored on a central server, like a single computer, that would be an epicenter in case of a leak or faliure; instead, data is distributed across numerous computers, making it more difficult for malicious actors to succeed in their actions. Transactions on a blockchain are encrypted, adding a layer of privacy and security.

Benefits of decentralized exchange

For long, there’s a concentrated effort at developing or rather democratizing system in the area involving money. The idea may sound contradictory at first, but with the help of decentralization, the objective seems achievable or rather is possible.

In case of, decentralized exchange of cryptocurrencies, the money transfer is made directly and quickly, without other parties overlooking the process and regulating or charging it. No intermediaries are involved whatsoever.

All exchanges are done anonymously, with each user hidden behind a specific code acting as a pseudonym. This makes the whole process secure, and hard for hackers to reach private information. However, there is still a lot more job to do regarding the overall privacy of DeFi, but things are moving in the right direction.

When exchanging crypto, it is advisable to use trustworthy platforms like Binance or Kraken. That way you won’t have the fear of data leaks or financial losses.

Decentralized exchange is a new, revolutionary way of financial interactions in the technologically advanced, digital world. Free of authorities, and secured by rigid protocols and encryption, DeFi is creating a new world where banks and middlemen will become a technological excess. The future will bring a lot of exciting financial development, and the economy will embrace each and every individual with an open arm.

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