Home 9 Alex Petrovic 9 Creating Decentralized Exchanges with Blockchain

Creating Decentralized Exchanges with Blockchain

Decentralized Exchanges (DEXs) are the new sexy fintech alternative to boring, bureaucratic centralized exchanges. They are safer than Fort Knox, more transparent than a sheet of glass, and give users ultimate control over their funds. Without relying on a single point of control, DEXs use a vast network of distributed nodes for transaction validation and system integrity maintenance. Are you ready to join the revolution?
Daniel Zacharias

Alex Petrovic

April 10, 2023
decentralized exchanges

Revolution is here! People are tired of centralized control, poor interoperability, and lack of transaction transparency in crypto trading. They want something fresh that screams freedom. That’s where decentralized exchanges (DEXs) come in, as they are shaking up the crypto industry like never before. No longer are we bound to opaque, easily hackable, and centralized exchanges. With DEXs, trading your favorite cryptocurrencies with transparency, security, and full control has never been easier! 

Are you ready to join the revolution?

Creating decentralized exchanges with blockchain: a beginner’s guide

Decentralized Exchanges (DEXs) are the new sexy fintech alternative to boring, bureaucratic centralized exchanges. They are safer than Fort Knox, more transparent than a sheet of glass, and give users ultimate control over their funds. Without relying on a single point of control, DEXs use a vast network of distributed nodes for transaction validation and system integrity maintenance. 

Here’s how it all started: Back in 2011, Bitcoin and the whole cryptocurrency movement gained momentum, going from tin foil theory into a fintech revolution. But it was missing something — peer-to-peer exchange without a middleman. People from the Bitcointalk forum proposed several solutions, like OpenBazaar and Bisq (previously Bitsquare). 

Unfortunately, every project crashed and burned. Lack of liquidity and scalability, along with security vulnerabilities, were their Achilles’ heel. 

That all changed in 2017 with the arrival of the 0x protocol, which forever transformed how we use blockchain for financial transactions. 0x is an open-source platform providing a standardized set of smart contracts, leveraging the perks of Ethereum blockchain and enabling peer-to-peer trading with any ERC20 token. And all without a middle or centralized authority! 0x protocol uses off-chain order books and focuses on interoperability — a BINGO combination for an efficient, fast, and interoperable decentralized exchange.

Fun Fact: ERC20 token standard’s origin comes from a virtual pet game.

Tamagotchi was a popular virtual toy in the ’90s. Standard’s creator, Fabian Vogelsteller, took inspiration from Tamagotchi’s ability to “live” on different devices. He wanted a crypto token standard with similar abilities, existing on multiple decentralized exchanges and apps at the same time. 

Decentralized exchange types – the fantastic 4 of blockchain 

After the 0x protocol gained popularity, decentralized exchanges became more user-friendly. New sexy features came along too! Features like automated market makers and limit orders made it easier for people to access crypto markets in ways only possible in sci-fi movies.

It’s what also brought different flavors of decentralized exchanges like:

  • Automated market maker (AMM) DEXs — Instead of order books, AMM exchanges use mathematical formulas to determine the price of assets based on the ratio of their supply. It’s like having your own crystal ball of the market’s future and knowing which token is going to the Moon. AMM exchanges are Uniswap, Balancer, and Curve.
  • Hybrid DEXs — Exchanges living between two worlds: AMM and order books. It leverages the order-book method for large and AMM for smaller trades. Hybrid exchanges are Bancor and Loopring.
  • Order books DEXs — Using order books for matching buy and sell orders, these decentralized exchanges mimic the good old-fashioned ones. Order book DEXs are 0x, Kyber Network, and IDEX.
  • Atomic swap DEXs — Using atomic swaps, peer-to-peer trading between different blockchain networks is easy as ABC. Atomic swaps are a trustless way of exchanging assets between blockchains without a middleman. Atomic decentralized exchanges are Komodo and BarterDEX.

The benefits and risks of decentralized exchanges

Decentralized exchanges shine where most centralized ones fail — Trust. DEXs don’t require trust. Executing trades between users with smart contracts is direct and trustless. 

No middleman, no centralized intermediary, and no BS!

With superior transparency and security come extremely low fees and a wide range of hot assets. Every DEX transaction gets a place on a public blockchain, and without financial control freaks glooming above, you don’t really need boggling fees. DEXs escape the claws of status quo fintech institutions and their strict requirements and regulations.

They are like the Wild West of cryptoworld, operating beyond any traditional boundary.

Decentralized exchanges bring what every user wants:

  • Privacy
  • Control
  • No financial restrictions

Trade any crypto asset you want with full control in your hands, free from restrictions and financial chains.   

But Buyer Beware: Decentralized exchanges aren’t your regular exchange. It’s not like you could open up an exchange office, get some crypto-currencies into your ledger, and you’re open for business. 

Building a decentralized exchange is literal rocket science. It’s complex, time-consuming, and can’t be built by anyone. 

Risks of DEX — tell-tale signs you must know about 

This is the Dark Side: Decentralized exchanges lack customer support, have slow transaction time, and are open to smart contract vulnerability. Any discovered backdoor or “hole” in the smart contract’s code is a green light for exploitation and malicious deeds.

Like mentioned above — DEXs are like the Wild West. 

Regulatory uncertainty is the decentralized exchange’s ugliest PR. Cryptocurrencies are relatively new fintech solutions that never stop evolving. Because of their unpredictable nature, regulations struggle to keep pace.

No chargebacks, user error, and price volatility also stain DEX’s reputation. 

The combination of low liquidity and trading volume, along with the irreversibility of trades in the event of fraud or user error, creates a perfect Death in the Afternoon crypto cocktail you do not want to taste.

Step-by-step guide to creating your own decentralized exchange with blockchain

Even if you gather the top talent of crypto development, how would you go about creating a decentralized exchange?

Creating a DEX is an extremely complex process. Think of it as building a space rocket in your garage. It requires a lot of planning, designing, and testing steps. And here’s what they look like.

Defining the scope and requirements of your decentralized exchange

Every DEX on the planet has a defined scope and requirements. They could be:

  • Type of blockchain technology used
  • Type of tokens your DEX wants to support
  • Available features 
  • Regulatory compliance 

The more clearly and precisely you define the scope and goals of your DEX, the greater the likelihood to withstand the test of time and remain successful over the long run.

Choose a blockchain platform for your decentralized exchange

Ethereum, Binance Smart Chain, EOS, and TRON are the most popular blockchain platforms for building decentralized exchanges. Ethereum is currently the Top Dog, the GOAT, the real OG… But not for long.

Binance Smart Chain and EOS, with their low fees and light-speed transactions, strive to take Ethereum’s throne. 

Don’t let popularity fool you, though. Choosing the right platform for your decentralized exchange solely depends on:

Designing the lifeline of your exchange – the smart contracts  

Smart contracts dictate the logic and functionality of any decentralized exchange. They are what execute trades, manage funds, and ensure your DEX is tucked in, safe and secure. Think of smart contracts as guardian angels, keeping the exchange transparent and bug-free.

There are different types of smart contracts to choose from:

  • Token contract
  • Order book contract
  • Escrow contract
  • Governance contract
  • Oracle contract

Integrating a crypto wallet into the DEX 

Users need wallets, or else how would they store their precious crypto assets?

It’s how they stash, manage, and trade tokens on the blockchain. Like with smart contracts, there are different types of wallets to choose from:

  • Web wallets — Super convenient providing quick access to user’s assets
  • Desktop wallets — More secure than web wallets, but a bit less convenient
  • Mobile wallets — Accessing your assets on the go is never a bad thing so why not incorporate it into your DEX
  • Hardware wallets — The second name for crypto security! But not so convenient and come at a hefty price

Developing exchange’s UI 

Developing a good user interface (UI) for your DEX is what’ll make or break the exchange! User-friendliness and efficiency are the pillars of any successful decentralized exchange. 

There are six UI aspects you must focus on if you want your DEX to succeed. They are:

  • Simplified trading process
  • Data visualization
  • Intuitive navigation
  • Mobile responsiveness
  • Customization
  • Feedback mechanisms

Testing and launching your decentralized exchange 

Your decentralized exchange seems like it’s good to go and set new crypto trading volume. But hold on for a sec.

There’s a high chance your DEX would crash and burn into ashes!

Here’s what I mean: A great rule of thumb is to test your decentralized exchange. Unit, integration, and security tests are essential as oxygen. Without them, your exchange is a target for cyber attacks, bugs, and vulnerabilities.   

After rigorous testing, launch your DEX on a test net. 

Testnet is like a safe space for testing decentralized exchanges before they hit the tracks and become the next Uniswap or SushiSwap.

The hardest step – Maintenance and DEX improvement 

Maintenance — a word every crypto developer hates!

It’s an ongoing, hair-pulling effort that the majority of the crypto community runs away from. But it’s what makes most decentralized exchanges run smoothly, with well-supplied liquidity and a strong community to support it. 

DEX maintenance revolves around three key points. If you ditch any of them, your exchange is bound for security breaches and failure. They are:

  • Following regulations
  • Regularly auditing smart contracts
  • Keeping up with blockchain updates

Why decentralized exchanges are the future of crypto trading

With decentralized exchanges, the crypto world is your oyster!

DEXs are like the superheroes of the crypto world, providing decentralized, transparent, and secure trading for all

With their blockchain powers and smart contracts, they are changing the game of traditional exchanges. No longer does a crypto community need a middleman, a crypto BigDaddy that’ll have a say in whether we trade or not, having a firm grip on our crypto assets.

With better protocols and interoperability, transactions are safer and faster, bringing a decentralized exchange revolution to our doorstep!  

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