What is the blockchain?
The blockchain is a cryptographic, decentralized record-keeping technology.
The blockchain is a type of distributed ledger technology (DLT), a public record-keeping system.
Instead of being controlled by a single entity, the distributed ledger is spread across thousands of computers. These computers are working together, as a chain, to verify transactions.
The reason why the blockchain is so appealing and disruptive is because it offers a verifiable, trans-parent, immutable and public record.
This technology enables data transactions and storage in an unparalleled safe manner.
It enables users to produce unique, time-stamped and forgery proof digital transactions and as-sets.
A blockchain is like a shared book where people write records. Traders can write financial transactions. Creators can publish unique and certified content.
Blockchain technology is changing many industries from food to healthcare. It is particu-larly disruptive in the area of finance, with cryptocurrencies and decentralized finance.
What is DeFi?
Decentralized finance (DeFi) cut out intermediaries in transactions and financial services.
DeFi, or Decentralized Finance is a blockchain-based finance.
The DeFi or Open Finance movement is building a new type of finance that would not be centralised around governments and banks.
DeFi offers a global, open and no intermediary alternative to financial transactions and all financial services – savings, trading, loans, insurance…
Defi for a more democratic finance
In theory, DeFi enables anyone to access finance simply with a smartphone and with an internet connection, anywhere in the world with no bank account, no financial or banking intermediaries. DeFi is thus broadening access to finance to everybody, particularly in underdeveloped countries. It is believed to bring access to finance to more than 1 billion unbanked people in the world (see report from the World Economic Forum).
What is a DEX?
A decentralized exchange (DEX) is a blockchain-based, peer-to-peer marketplace where transactions happen directly between crypto traders.
Transactions are operated through smart contracts, which are autonomous software running on the blockchain.
Decentralized Exchanges are enabling cryptocurrencies exchange without the need for an intermediary such as a bank or a broker.
Most Dex are running on Ethereum or Solana blockchain. Popular Dex include Uniswap, Sushiwap, Orca, Raydium and Openbook.
What is the difference between DEX and CEX?
1/ Centralised vs. decentralized
A CEX is a Centralized Exchange. A DEX is a Decentralized Exchange.
‘Centralized’ means the exchange is running through a private entity. It acts as an intermediary in the transactions.
On the opposite, a DEX is running directly on the blockchain through autonomous programs (smart contracts), i.e. with no middlemen.
2/ Crypto-fiat vs. crypto-crypto trading
A major difference is the ability to exchange fiat money or not.
On a Decentralized Exchange platform, you can only exchange cryptocurrencies, as opposed to Centralised Exchange (CEX), where you can exchange crypto for fiat currencies (US$ or €).
3/ KYC vs. anonymous
What differentiates a DEX from a CEX and attracts a lot of users is the absence of a lengthy KYC (Know Your Customer) process. Indeed, on a CEX you must register your identity details, while on a DEX you just connect your wallet. A Dex enables easy and private transactions.
CEX are less secure than DEX. They are more exposed to technical issues, outages and hacks.
Another key differentiating point is the security of your wallet. A DEX works with a non-custodial system. This means the platform does not host your wallet. Users retrain full custody of their wallet, their blockchain accounts, and therefore their assets.
CEXs provide custodial services and take care of managing your wallets. But users lose full control over their blockchain account, which can prove dramatic in case of sudden collapse or scam (cf. FTX scandal…).
Not your keys, not your money.
Most services on a CEX incur transaction fees, which are not always transparents.
DEXs offer very competitive transaction fees. Of course the comparison needs to take into accounts the gas fees, which may differ between different crypto exchanges.
In reality, most traders use a CEX such as Binance to buy cryptocurrencies from traditional currencies, and then switch to a DEX for faster and more efficient trading.
In fact, Decentralized Exchange brings all the benefits of the blockchain to the users as they are truly decentralized, i.e. automatised and trustless.
In short, If a CEX is easier to use for beginners, and allows for fiat/crypto transactions, a DEX is safer, faster and fully decentralized.
What is a CLOB?
1/ Order books for more accurate trading.
Central Limit Order Book mechanism (CLOB) enables optimal order matching on decentralised exchanges.
A Central Order Book sets the price for a cryptocurrency based on current buy and sell orders. This is the same method used by traditional stock exchanges (e.g. NYSE, Nasdaq).
Buyers and sellers place bids and ask for specific prices. The exchange is processed when bids and asks match. With the CLOB system, traders can choose the price and size of their trades. They have more control over their trading operations.
This is the mechanism powered by Open Book and other big Solana DeFi protocols.
2/ AMMs vs Orderbook.
First decentralized exchanges were built under the automated market maker model (AMM).
AMM allows for automated cryptocurrency trading, through smart contracts. AMMs process transactions immediately and automatically. Instead, with order book exchanges, users wait until their limit orders are fulfilled.