DEX - solution against CEX
“Fraud and deceit are anxious for your money. Be informed and prudent” — John Andreas Widtsoe
This is probably one of the most popular quotes when it comes to money. Said at the first half of 20th century it sounds even more relevant today when we earn more, consume more, invest more and trade more. When it comes to managing our own money it is of course a matter of personal choice but it is also our own responsibility to be well-informed of what is going on with this money.
In Cryptocurrency world we use digital money, called “tokens”. We have the freedom to do with them whatever we like- e.g. to invest them in ICOs waiting for huge profit or to trade them on exchanges trying to at least double the amount. In the decentralized crypto world we have the ability to fully control our assets. Unless we use centralized platforms. If we do so, we lose all the privileges of the newly developed crypto world. Yet, most of the people are still using CEX as easier way to trade their assets. But let’s have a look inside- how are assets traded on CEX.
In CEX assets are stored in a central server (extremely hackable) and are govern by a centralized body. Pretty much like banks. But a part from the risky technical nature of these market places, let’s talk more about the way of trading performed there.
Have you heard of front-running?
If not, keep reading- better have it in mind next time you trade on CEX. Front- running is a strategy used by centralized entities to generate profit from their advanced knowledge of customer trades. Having the ability to foresee its customers’ trades, CEX can forecast the movement caused by the upcoming trades. That way brokers have the power to insert their own orders before executing their customers’ trades in order to take advantage of the situation. Let’s give an example. A regular user finds a good deal of Bitcoin being sold at the rate of 6,000$ while the current price is 6,400$. He struggles to submit an order to buy the cheap bitcoin. His order is now in the queue. The broker/CEX immediately notice the order. Believe me, it is not the user who is going to take the bargain- the exchange will catch it first. Astonishing, right? Another way to manipulate the environment is to use the mining process. When a trade is submitted to the blockchain, it awaits verification from miners who decide which transactions to include in the subsequent block. Since the flow of transactions if huge and the capacity of the blockchain is limited, the transactions which were not mined go to a pending transaction pool called mempool. The blockchain of the mempool is entirely public which enables front-runners to enter their trades first, profiting on the resulting price movements when prior orders are finally executed. All they have to do is to make their own transactions more attractive by setting a higher gas prise. This is the way to ensure that their trade will be executed before the transaction they are attempting to front-run.
What solution provides the DEX?
One of the main goals of the creators of decentralized exchanges is to achieve trustlessness without a third-party control. In trustless systems, we do not rely on participants‘ morals and ethics to maintain the health of the system. The smart contract of the DEX makes it unprofitable if not even impossible to cheat, leaving fair play as the only viable option. It all boils down to one question of trust. It is a protocol that decentralizes trust and instead of a central party verifying transactions, instead of one single bank server verifying transactions, the transactions are verified peer-to-peer in a democratic way by consensus. It is all done automatically by the network — not people behind it. It is a machine consensus. Right now, the blockchain economy is occupied with designing protocols that preclude cheating. One good example are the so-called cross-chain atomic swaps representing the right way to honest trading. To put it simply, an atomic swap is an instantaneous cross-chain exchange of one cryptocurrency to another without the need of third party intermediaries. The key to it is the smart contract through which orders can be funneled, removing execution control of third parties. The smart contract funnel can be utilized to enforce rules regarding trade execution in a way that eliminates unwanted trade manipulations such as front-running. As a result the machine consensus or so-called smart contract will eliminate every possibility of fraud.
Unbelievable listing fees
Ideally, when you invest your money in ICO, you expect that your money will be used to build the product or service and add value to the project by allowing the company to hire more developers, fund more marketing, etc. The reality is completely different. In order to make their token successfully traded ICOs need to pay an enormous listing fee to a major exchange. We’ve heard of Binance increasing their listing fee from $2m to a whopping $6 million, due to demand. And even if the project can come up with that astonishing amount, there’s still no guarantee that the exchange will list your ICO. These figures represent a gross abuse by exchanges of their role as gatekeepers of liquidity.
Moreover many major exchanges require that you retain the services of specific bots known as market MAKERS (MM). In simple terms, a MM is an entity that will make sure that their computer lists at least 10 buy orders and 10 sell orders on the exchange at any time. Some exchanges require 20 orders on each side, or even more. The job of the MM is to make it appear as though there is significant activity and liquidity on the market on both sides, and to generate the appearance of high volume. It is estimated that close to 90% of all trades on exchanges are with such bots and not humans. MMs are not free, and it’s typically up to the ICO to pay for the services of the market maker. Naturally, those services are not cheap, and not surprisingly, the exchanges will happily put you in touch with, or force you to work with, a specific company which in many cases also represents the exchanges’ best interests. Not only that but exchanges often have a third fee. That is, the exchanges will demand a deposit of up to millions of coins or tokens from the ICO in what they call a “liquidity deposit” or charge. As a result the exchange has the ICO’s coins, a market maker, and an army of speculators. Now all they have to do is to wait for just the right time to front-run their own clients (the ICOs and users of their platform). As these exchanges can see the trading volume and movement before you, they always win.
The hope lies in the DEX
DEXs provides one simple decision — it eliminates all fees for tokens listing on their platforms. You can list your own token without spending a single cent. It is just a matter of time for crypto traders to move away from rent-seeking centralized exchanges and seek salvation in the far more fair decentralized trading.
Centralized government
As a centralized body, CEX has also a centralized government which is another hindrance against the fair trading. Much like banks, CEX will always put their own interest first. CEX is just another centralized platform with this huge man in the middle who controls all the data and dictates the rules of the transactions and the trading as a whole. So, instead of the financial world becoming more decentralized, it become more centralized. There is no mechanism which allows users to participate in the decision-making process. CEX is a huge private company which looks at its users just as consumers. CEX sets the rules and the consumers follow them.
Let’s break the chains!
Currently a world without CEOs and presidents may sound insane, but could one day become a reality. Here comes the DEX again. Decentralized governance distributes power from the top of a decision-making hierarchy back to the network. Some of its tools are DAOs, Tokens that govern (combining the governance utility with the fee utility ensures that the distribution of this token is wide enough and aligns voting power with stakeholder interests), Quadratic voting, Liquid Democracy, Holacracy. With smart contract it is not only money without banks, it is also money without bank manager. Due to this machine consensus there is no Central Authority. There is not one person or not one entity who can turn off your token. These are small steps towards the model of protocol governance but they will eventually lead to an enormous change in favour of the users.
To all current and future users of any kind of exchanges :
Spend some time investigating the crypto trading environment in order to improve your chances of bigger profit. Each minute spent on research is a good investment in your own money, which then you are going to invest for a better life.
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