HOME INSIGHTS COLUMN DEX 101: THE PRINCIPLES OF A DECENTRALIZED BITCOIN EXCHANGE
In 2017 „ICO“ was the abbreviation par excellence. In the year 2018 it could be the letters D-E-X. What is the concept behind it? BTC-ECHO takes a close look at the Bitcoin and Crypto exchanges of the future.
A decentralized exchange (short: DEX) is an exchange exchange that has no single point of failure. The exchange therefore does not act as a trustee and does not store any information about the users. Instead, it is a protocol that is executed individually by each user on the computer. The interactions therefore happen peer to peer – directly between the individual buyers and sellers.
The crypto trader Decentrality of a DEX
For a DEX to be able to call itself truly decentralised, it must fulfil certain conditions according to onlinebetrug: On the one hand, the money must always remain with the crypto trader exchanging party. In other words: at no time does a central, third party fulfil the function of a trustee. With the help of cryptography, this role is assigned to a multi-signature wallet. Buyer and seller each receive a key to a 2 of 3 Multi-Sig-Wallet. The third key is only used in the event of a dispute. In this case, a random mediator is selected, who makes a binding judgement based on the evidence.
On the other hand, no central servers may exist. A centralized server architecture represents a single point of failure and thus a risky attack vector. The network of traders can be decentralized using the The Onion Router Network (TOR). Users operate their own node and all communication is end-to-end encrypted. In other words, the exchanging parties are the only ones who have each other’s information at their disposal.
Of course, a DEX has no registration or authentication process. Furthermore, it is important that the publisher/developer of a DEX is not a company that could be legally prosecuted.
The added value of a DEX
The advantage of a DEX is that it is decentralized and therefore offers hardly any attack surface. The principle of decentralization is already known from Bitcoin. Here, too, one of the most essential points is security, privacy and censorship resistance. Nobody can manipulate the blockchain. Nobody has special privileges. Before the protocol all are equal.
A centralized stock exchange is a so-called honey pot, a potential target for a hacker attack. The security precautions of such an exchange cannot grow proportionally with the pot to be secured. In short, above a certain size, the incentive for hackers is so great that the exchange can no longer defend itself adequately. In such attacks, several hundred million US dollars are usually captured. There is no danger of this with a DEX, because everyone holds their own money.
What crypto currencies are for „money“, DEX are for „trading“. They allow people to get in direct contact with each other and to trade without knowing or trusting each other beforehand. DEX in combination with crypto currencies represent the ultimate free market economy in which players can haggle freely with each other. You can’t switch off a DEX any more than you can Bitcoin.