Decentralized exchanges are the future of cryptocurrency trading
As of today (July 27th, 2018) a transaction volume of all cryptocurrencies amounted to almost 15 billion dollar. Let’s put it into perspective.
NASDAQ has scored today a volume of 161 billon dollar which is around 10 times more. However, cryptocurrency market is closer to a foreign-exchange market, which has daily volumes of over $5 trillion. Compared to this, cryptocurrencies feel still pretty tiny, but it is the number that we can use to estimate the maximal potential volume for cryptocurrencies. There is a difference with a factor of 300. If bitcoin price rose by the same factor, the price per one bitcoin would be almost 2,4 MM US-Dollar.
Can the cryptocurrency market stand up to this potential? Looking at the growth of the number of bitcoin wallets, we can notice that there is an exponential trend. In my opinion, it’s up to two factors for the trend to continue.
1st adoption factor: Security
Today, most financial exchanges are centralized. This means that money deposited by users is often held in one location. For hackers it is an easy aim to attack. Centralized exchanges have a history of poor security. In the past year alone, the token economy has seen over $1 billion in funds stolen. As long as this risk persists, global adoption of cryptocurrencies and decentralized services is blocked.
Decentralized Exchanges and Security
From a fundamental viewpoint, decentralized exchanges offer much more security and control to all stakeholders than centralized exchanges.
I was very much surprised to discover that the volume on centralized exchanges is much greater than the one on decentralized exchanges. In fact, 99% of cryptocurrency transactions still go through centralized exchanges. What is it that stands in the way?
2nd adoption factor: Usability
The relatively poor user interface and user experience of decentralized exchanges restricts their reach. Decentralized exchanges are still well behind centralized exchanges in terms of functionality, including shortcomings in order types. Traders need to wait and often pay for creating new orders or filling existing ones. Additionally, all decentralized exchanges are currently limited to work with one blockchain architecture. However, recent advancement of decentralized exchanges show that a part of these problems may soon belong to the past.
Brace yourself. Usability is coming.
A noteworthy project that functionally covers the usability challenges is Switcheo. The technology offered by this exchange network provides an instant trading and allows for interoperability between different blockchains, such as Neo, Qtum and Ethereum — in fact, its the first world multi-chain exchange. These features may very well position Switcheo to compete with such exchanges as Binance.
Decentralized Exchanges are the next big thing…
Decentralized exchanges will contribute significantly to the security of the decentralized ecosystem. The only hurdle on its way is the usability. There are already projects significantly contributing its share to this improvement. Once we’re there, decentralized exchanges may face a massive growth. The fact that 99% of cryptocurrency transactions still go through centralized exchanges poses a great growth potential within an already growing crypto market.
Before this happens, there’s a serious chicken-and-egg problem that may prevent the model from challenging the established cryptocurrency exchanges.
In short, you need liquidity to get adoption, yet in order to attract traders, liquidity must be given. If Switcheo and other decentralized exchanges find a path to address this challenge, we may see the trend of transitioning to decentralized exchanges would be driven by smaller projects challenging the status quo.
Please share your thoughts about DEX technology and their future!