What is a Decentralized Exchange System?
A decentralized exchange (DEX) is a cryptocurrency exchange in which it operates in a decentralized way, i.e., without a middle authority. Decentralized exchanges permit peer-to-peer trading of cryptocurrencies.
Because users do not require to transfer their assets to the exchange, decentralized exchanges diminish the risk of theft from break in of exchanges. Decentralized exchanges can also avoid price manipulation or faked trading volume that is done through wash trading, and are more semi-anonymous than exchanges which implement KYC / know your customer requirements.
There are some big signs that decentralized exchanges have had suffer from low volumes of trading and market liquidity. The ZeroX (0x) project, a protocol for creating decentralized exchanges with convertible liquidity attempts to solve this issue.
A decentralized exchange could still have centralized segments, whereby some control of the exchange remain in the hands of a central authority. An example that seems to fit is being IDEX blocking New York State users from accessing and placing orders on the platform.
In July 2018, decentralized exchange Bancor was attacked and reportedly hacked and suffered a had a loss of $13.5M USD in value before freezing funds. In a made Tweet, Charlie Lee, the creator of Litecoin said and claimed an exchange simply can not be decentralized if it is able to lose or freeze customer funds.
Operators of decentralized exchanges can begin to face legal consequences from government regulators. One good example being the founder of EtherDelta, who was in November 2018 settled charges with the U.S. SEC (Securities and Exchange Commission) over operating an securities exchange that is not registered.
Are Decentralized Exchanges Begin to Be The Future Of Cryptocurrencies?
Did you know centralized cryptocurrency exchanges are not really safe for your cryptos as you may thought? If you know that, then that is a good thing. But if you don’t know, then you should educate yourself more!
Using cryptocurrencies means that you are your own bank and taking care of your own funds / crypto funds. But when we use one of the centralized exchanges like Bittrex or Poloniex, we actually imperil that fact.
Because from the moment that we start using these centralized exchanges, they become the keepers of our funds, and we are have one finger in our mouth and no longer in charge.
For the naive, centralized exchanges are exchanges that simply don’t allow users to control the their crypto funds and its private keys, and instead, they keep and stack those keys in a centralized and maybe protected server or database. This way of working opens up many problems and the possibilities of single points of failures and hacks that could happen by malicious actors.
I think about what an ridicule it is for decentralized currencies to be the victims to centralized exchanges, And if this lasts, what will be the future about cryptocurrencies? And what is the solution? The solution is having and using decentralized exchanges (DEXs).
List of DEX
- Kyber Network
- Bancor Protocol
This will, I think, ultimately decide the future of cryptocurrencies.
What Is A Decentralized Cryptocurrency Exchange (DEX)?
A decentralized crypto exchange comprises many things, but I believe that an exchange that has following qualifications then it is meant to be a DEX:
- An exchange that permits its users to control their crypto funds.
- An exchange that doesn’t have one point of failure like centralized servers or databases that are inclined to hacks.
- An exchange that has no trustworthy third party setups.
- An exchange that no government or any one else can shut down like the Chinese exchanges that shut down.
- An exchange that is not controlled or managed by a single or group of companies.
- An exchange that respects the privacy of their users and doesn’t ask for several registrations and KYC verifications.
Benefits of Decentralized exchanges
Decentralized exchanges have so many benefits. Some of which are:
- DEXs satisfy the basic rule of using a decentralized currency/asset because there is no logical point in using a decentralized currency or asset in such a centralized environment which can be taken down any time. Centralization of exchanges basically denies the whole purpose of the use of cryptocurrencies in the first place.
- DEXs further catalyse crypto adoption and will allow cryptocurrencies to thrive.
- DEXs negate the censorship or control of governments or any group of companies.
- DEXs make crypto people their own bank.
- DEXs honor the privacy of their people and bypass the need of doing any KYCs, registrations, etc.
- DEXs do not have downtimes cause they have no central thing and will be hosted in a distributed manner.
- DEXs provide seamless liquidity for many cryptos and other tokens that are not able to list themselves as ICOs on centralized exchanges because of several rules and regulations which are set forth by these exchanges and their backing companies.
Drawbacks Of DEXs
DEXs also have downsides. Some of the drawbacks are:
- Users are not habituated using decentralized services. We like centralized services more due to the convenience, and in that process, we give up many things like privacy, freedom, etc.
- They aren’t so user-friendly (as of now).
- There are serious liquidity problems due to lack of volume.
- There is a lack of advanced trading functions such as margin trading, margin lending, stop losses, bot trading, etc.
- Most DEXs are now are in their beta testing stage, and users stand the risk of losing their funds because of insufficient testing.
- There is no central authority or support system, so it’s hard to get your problems resolved.
Future Of DEXs And Reality Check
After reading the downsides of DEXs, you might say that DEXs will not be successful… but I think they are the only way that cryptocurrencies can survive and thrive.
The kind of benefits that DEXs provide will ultimately dwarf the shortcomings.
And recent events like the China ban, the Korea ban, and the Russia ban are catalyzing the need of developing DEXs more than ever.
And this catalyzation is already witnessing a rapid proliferation of DEX projects in the crypto space.
Here is a list of a few promising projects that are on my radar and are in different stages of development. (I am going to discuss some of these exchanges in detail on PaperBlockChain in the near future, so stay tuned.)
Cryptobridge, EtherDelta, Bisq, 0x, OasisDex, Kyber Network, Bancor Protocol, AirSwap, WavesDex, OmegaOne
And the surprising thing is that all these projects have entered the crypto-sphere in the last 6-8 months, which in itself speaks a lot about the serious sentiments that this market has toward cryptocurrencies and other decentralized assets.
And last but not least, by seeing the proliferation of so many decentralized exchange projects, I am pretty confident that we are going to witness a competitive product in this vertical very soon in the next 6-8 months.
Now it’s time to hear from you:
- What do you think about the future of DEXs?
- Which DEX project are you following/using?
- How has your experience been?
- Did I miss any good DEX projects in this list?
Do let me know your thoughts in the comments section below!