What is a Decentralized Trading Protocol?

Decentralized exchange (DEX) doesn’t use the order book like a centralized exchange does. The resulting orderbook allows participants to place and receive trades directly from each other without the middleman or facilitating institution. Unlike decentralized exchanges, the centralized exchange does not have Automated Market Makers (AMM) to match orders. A decentralized exchange is borderless, serving anyone in any country without discrimination or geographic restriction. However, there are risks to a DEX. It is important to research and understand its risks before you participate in any cryptocurrency trading.

How Decentralized Protocols and Exchanges Work

Decentralized trading protocol uses a distributed ledger protocol to exchange trades. This technology is similar to distributed ledger technology, involving the process in a form of a system of matching buy and sell orders. There are two types of matching: automatic matching and manual matching. Automated matching involves a computer algorithm, while “manual” order filling requires a human to identify resting orders. The disadvantage of automatic matching is that prices can change significantly after a Maker places an order.

The decentralized exchanges that are being developed today are not governed by a central entity like a bank, but instead rely on peer-to-peer networks to link buyers and sellers. Moreover, these exchanges are non-custodial, which means that you will keep control of your private keys. Furthermore, you will not be asked to submit your personal information to participate in a DEX. The only downside is that they can’t enforce KYC and AML rules, so users can’t be trusted to keep their funds.