Exchanges play a huge role in the cryptocurrency industry. Without them, people would not be able to trade and invest in crypto. We have a fantastic array of platforms such as CEX, Coinbase, or Kraken. While centralized services like these ones are currently the most popular and trustworthy, a new contender is starting to emerge on the market. Let’s look at the features of decentralized exchanges and examine the chances of them becoming market leaders.
A decentralized exchange (DEX) allows users to trade directly with each other, without the need for an intermediary. On a traditional website, a central server manages your information, bank details, and transactions, while a DEX offers users the chance to remove this control. This corresponds with intentions of cryptocurrencies and blockchain – every participant having an influence on the network is the key to success. Currently, decentralized exchanges deal exclusively with crypto-to-crypto trading, but there is no reason why they couldn’t include fiats in the future.
So why are decentralized cryptocurrency exchanges useful? As we’ve mentioned, these platforms are more in line with the original vision of cryptocurrencies which were intended to have no governance and control. For now, let’s explore four main benefits that DEXs provide.
A pure decentralized exchange uses only blockchain information – no personal data (names, email addresses, and bank account details) is required. You only need a public address to use an exchange, while on the traditional platform, you have to share your account information with the operator. This is fantastic for those who wish to trade privately and keep their transactions unknown. But if DEXs become prominent, regulations could be enforced.
Centralized exchanges maintain control of your finances during transactions. Moreover, funds kept on the website, unless it’s a cold storage, technically aren’t owned by the users themselves. With decentralized services that don’t actually store any assets and just connect people with corresponding orders instead, you have all the responsibility and control every process.
A centralized exchange is easier to attack because of a single server or database. When the platform is decentralized, there is no single point of failure or entry. It is much more difficult for a hacker to target DEXs as most of the processes take part on users’ computers. However, it comes at a price – usability is often sacrificed for security. Currently, this type of crypto service is extremely complex, as it has to maintain more information and provide more steps/clicks for conducting transactions.
DEXs have no downtime at all. When an upgrade is required, it is simply distributed to each node on the network (computers of a buyer and a seller). As with security, there is no single failure point, therefore it is unlikely that a decentralized website will crash completely. If one node within the network goes down, others can simply take up the slack and continue to operate.
Although decentralized exchanges have many benefits, they are far from perfect. The following are some of their main drawbacks.
The actual process of using a DEX is not straightforward. When using a centralized exchange, you have to simply register an account, deposit funds, and start trading. To use a DEX, you must connect to a DApp or install a specific client. Furthermore, you must usually have to set up a secure wallet and sometimes a DEX node.
Centralized exchanges currently account for approximately 99% of the trading market. Their alternatives have a small holding and therefore have a much smaller liquidity. When using a DEX, you may suffer from a lack of available trades.
When using a decentralized platform, you are relying on the speed of your own node, the network, and the recipient’s node. This can cause latency and slow down transactions. Operation through a central server makes these processes quicker.
It is truly difficult to tell whether DEXs will become prevalent in the future. Currently, their technology is still in development. These platforms certainly have to improve their accessibility and transactions speed – this will give people more reasons to use them. Furthermore, DEXs must build their user base or find an alternative method of maintaining a higher liquidity.
At this point in time, centralized exchanges simply have more customers and a greater offering. But we feel that decentralized services have a bright future. Already existing ones such as EtherDelta, AirSwap, Bancor, and Altcoin are experiencing growth. There are many hurdles to overcome before they will be ready for the masses, but current trends are positive and point towards long-term improvements and viability.