The power of decentralized exchanges

[notig]

I'm still trying to wrap my head around decentralized exchanges. But I thought I would give a shot at trying to understand them by explaining why I think they could be powerful.

The way I understand decentralized exchanges is that they use "soft connections" and regular exchanges use "hard connections" . For instance... to get money on a typical exchange you need to have a bank linked to that exchange. And you need to then send money to that bank physically. You could wire it from another bank or use a third party payment processor which still goes through the bank. That's a "hard connection"


A soft connection is more flexible. You don't need to send money directly to an exchange for it to appear there. For instance....... say you have an exchange called Gringo. Gringo "trusts" this gas station over in some city 1000 miles away. They trust them with a certain amount in monetary value. When someone goes into that gas station... it acts as a decentralized exchange because the customer could simply hand 100 dollars over to an employee inside and then the gas station could send a communication to the exchange that the money is there. Instantly that person could have money on the exchange and ready to buy bitcoin even though none was actually sent because there is a soft connection between the gas station and the exchange. This is a powerful idea because it means that if banks started colluding and cutting off money supplies to exchanges you could circumvent it.

So how then does the money actually get to the exchange?  Well that's where things get interesting. You could do it the old fashioned way and take it by donkey. You could just take whatever amount of money you accrue in a weekly period and send it through the mail each week. You could do something similar to banks and hire an armored truck to do it. But there is another more clever way that Ripple uses. Essentially what happens is more and more people join the network and instead of having to send money to the exchange........ debts and credits are analyzed across the network and they are then balanced out.

For instance suppose someone sends a bitcoin to the exchange and it happens to be the bitcoin that was bought with the money from the customer at the gas station. Where does he get his money? Well if he is also part of the network.... if he is in debt to say.... his tailor.... and his tailor was in debt to the gas station because they have a mechanic that fixed his car... then instead of having to actually move this money at all the debts and credits could be offset and the effect would "ripple" through the network, balancing out debts and credits in whatever optimal ways are possible. The person selling the bitcoin would get his debt to his tailor erased... the tailors debt to the mechanic would be erased and the gas station would turn the money over to the mechanic.