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Moving Forward With Decentralized Exchange

The year-end of 2018 has been marked with the downfall of the traditional institutions slowly setting foot in the centralized exchanges. How ironic does it sound, especially in a time where we only hear about decentralization?

Decentralized exchange you are wondering?

If you have already heard about it, great! And if not, don’t worry, hopefully this small article will help you dig deeper on why it matters. Digital Asset Exchanges, although, already well secured, are still vulnerable to hackers and other ill-intended figures. That being said, there are considerably lots of cases of hacking and crypto funds theft such as with Binance — trading irregularities , Mt. gov — 470$ million USD wallet hack, Bithumb — 35$ million hack, Coincheck — 500$ million hack and the list goes on. It is unfortunate but we will keep seeing ‘poorly managed’ centralised exchanges getting hacked. Luckily, Decentralized Exchanges or DEX are starting to make their way into the crypto space. Much like the different distributed ledger technologies that are available and being worked on, the purpose of setting up a decentralized exchange incorporating blockchain for example, allows transactions to be more transparent, secure, and most important of all, that you as an investor are in full control of your funds and investments. Simply put, instead of going through the centralized exchange which acts as a middleman, investors and traders can enjoy direct, peer-to-peer, trade.

So how will a decentralized exchange be on our favor and why is it not here yet?

Well, peer-to-peer have their own downsides and upsides. Let us have a look at a few of them.

Once DEX will fully be developed it will allow us to trade with lower fees. As it uses blockchain technology, trading will take form through smart contracts which can’t be tempered with. It is therefore difficult to actually sue someone if a dispute occurs. Hacking will even become more difficult and possibly lessen to a greater proportion. Side fact, since the introduction of bitcoin, 10 years ago, it has never been hacked yet. To continue, DEX ideally will lessen price manipulation and putting up fake trading volume but here again, there is a double edge sword as it might actually facilitate price manipulation as there is no one monitoring the activities. Moreover, as all transactions are made and distributed publicly, traders will benefit from anonymity as to take part in any blockchain space, most of the time, you are only requested to use your public and private keys. Additionally, as it is a peer-to-peer transaction, the government will have less power on the possible taxation, confiscation, and censorship of your assets.

It does sound great. Though, as many DEX are being developed, decentralized exchanges are still a long way from being crucial competitors to the centralized exchanges. Before we go in the huddles of DEX, let’s remind ourselves some important facts. Largely as of today, in order for us to buy cryptocurrencies, we have to go through a centralized exchange as there is no direct fiat to crypto exchanges. Another important fact is that a centralized exchange “normally” filters the coins that are being listed. Thus promising only quality coins on their exchange which in turn filters the bad coins or scam coins from the already 2300 other coins on the market — number according to coinmarketcap -. Moreover, a centralized exchange is under the supervision of the SEC and has the obligation to protect its investors if something happens to their system. But what about decentralized exchanges? As the technology is continuously evolving, what we are seeing more and more are smart contracts and protocols being built on top of the actual blockchain and here again, these blockchain additions are vulnerable if poorly coded. We can take an example of etherdelta or the DAO. So, who would be taking the responsibility for any failures as it is decentralized?

Let us now dive into the multiple huddles DEX are facing. Trading speed could top the list. As we now know, scalability is a big issue in the blockchain space. This is partly due to the blockchain size and traffic increase, as the validation of transactions slows down as more computing power is required. Simply put, if centralized system needs more speed, they can just add more server. In the contrary to decentralized systems, when they need more speed, they actually need more miners or another, faster consensus algorithm. Another setback is the design of a user friendly interface. As of now, it is still a challenge for a non-crypto related person to simply start trading in the crypto space as a minimum amount of knowledge is required to understand the concepts of public keys and private keys, “GAS” usage, transactions fees, and smart contracts. Security, remains another issue as authentication of user identification without a centralized party still remains a challenge. With a decentralized system, there would have to be some sort of digital entity that is qualified and trusted by all users to be put in place. But here again, who would be the judge of that? And last but not least smart contracts reversal. As of now, there is no practical mean to cancel or adjust your smart contracts once it is execute it is irreversible and any modification or cancellation would only increase the network cost.

Finally, the debate still hoovers around if having our digital assets secured through only a digital key that once lost, is whether or not irretrievable, scrambles the whole impression of something being smart in the first place.

While there are still many challenges ahead, we, at Bitkub.com, are definitely excited for DEX and while the crypto space is continuously growing and developing at a high pace, we are closely watching the technologies being put in place. It has been said countless times that decentralization remains the pinnacle for this technology to succeed — a peer to peer system where a strong and coherent community that works towards a shared goal.