Isn’t it kind of ironic that decentralised digital currency which tries to minimise and even eliminate where possible the reliance on a 3rd trusted party (trustless) is being traded on infrastructure and technology that’s relying on a centralised 3rd party?
But the recent events, the hack at Coincheck where 500 million dollars worth of coins were stolen and the unannounced downtime at Binance make it clear there’s a need for decentralised exchanges. The reason we don’t have that many DEX (=decentralised exchanges) today that can compete with the centralised exchanges is that it’s not an easy thing to do.
The above graphic shows some differences between centralised and decentralised exchanges. The most important differences are your funds stay under your own control and there is no central point of failure. Anonymity is relative because if you want to trade vs fiat currency some form of KYC (know your customer) is still needed when you want to withdraw to your bank account.
First of all, we know how slow transaction times for crypto can become we’ve all experienced it before. Now imagine a decentralised exchange processing hundreds to thousands of transactions a second on a blockchain. Not only that we are faced with cryptocurrency that exists on different blockchains that need to reassign ownership near instantly. And not only that we also need a mechanism to ensure that both parties receive what they expect without a 3rd party mediating the transaction in a fair way.
So you see it’s not that easy to completely decentralise the swap of different coins.
There have been some notable advancements in the creation of DEXs. It started with atomic swaps. Just think of a situation where two people with a key (or code) each needed turn the key at the same time to execute a launch sequence.
Atomic swaps are similar both parties need to confirm a cryptographic code within a set timeframe to execute the trade. If one of the two fails to do this then the exchange does not take place and the coins go back to their respective owners.
Atomic swaps when both coins share the same cryptographic hash function are easier to accomplish than when two coins use a different cryptographic hash function. On October 7th 2017, Altcoin.io completed the first Ethereum to Bitcoin atomic swap, which is quite a feat as we are talking about two different blockchains involved in the process.
The next milestone of significance was the off-chain atomic swap. Off-chain atomic swaps are extremely fast & require no fees as they happen off-chain. This is key in the success of an exchange as speed is of the utmost importance in an environment with high volatility like crypto trading.
This is where the lightning network comes into play it is a protocol that enables us to trade coins, as much as we like, off-chain. It creates a payment channel between traders without the need for miners to confirm each transaction, once the transactions are done between both parties each respective chain is updated and only then, the channels are closed.
It’s pretty obvious to see how this technology is helpful for atomic swaps.
- It’s fast (the chain doesn’t process every transaction only on close)
- It’s cheap (no tx fees just a fee to close the channel and update the respective chains)
To have an idea of the current situation of atomic swaps between some of the major coins you can go to swapready.net
One of the main issues with decentralised exchanges is the number of coins they list at the moment and as a result liquidity.
Semi-decentralised
Although both Changelly and Shapeshift are not actually decentralised they do have some “decentralised features”, e.g. your funds are not locked up in the exchange process for a long time but just for the transaction time.
Decentralised
- + trustless,
- +on-chain,-slow
- -no auto-matching
- -expensive & difficult
- -frontrunning by miners possible)
- + secure
- + point to point trades
- + anyone can relay trades
- - financial risk for relayers, if buyers cancel last minute
- - gas cost risk if one party pulls out the last minute gas cost still has to be paid, miners could abuse this to set up bogus orders
- +no relayers or order book
- +no transaction fees
- +secure
- -reserve operators set the price
- -liquidity issues possible
- +secure on-chain
- +p2p speedy
- +no frontrunning possible
- -no auto-matching, so it’s more like eBay for tokens
- -bogus orders to manipulate pricing is possible
- +fully decentralised
- +nice gui
- +more than just an exchange
- +user issued assets
- +fiat assets
- - low adoption
- -limited liquidity
- +fully decentralised
- +user issued assets
- +fiat assets
- - low adoption
- -limited liquidity
- +desktop application
- +anonymous
- +fiat currency support
- -gui
- -limited liquidity
- -no auto-matching
- +Fully decentralised
- +24/7 customer support
- +very nice gui
- + has done successful atomic cross-chain swaps
- - still in testing phase, but signup is already possible
Conclusion, choice abound but my personal favourite for the future is altcoin.io because they are using cross-chain atomic swap and lightning to build their tech around and their gui is similar to that of centralised exchanges and user-friendly.
The above references an opinion and is for information purposes only. It is not intended to be investment advice and may contain affiliate links. Seek a duly licensed professional for investment advice.
