The Argument for Decentralized Exchanges and Apps
Why all the hype around decentralization?
Decentralization is core to most discussions of cryptocurrency. Decentralization challenges many of the established ways of doing business, and as such has made regulators, institutions, and investors rethink their strategies in this market.
What’s it all for though? Why go through the hurdles to create decentralized currencies, applications, and exchanges? Centralization offers several benefits, but those unfamiliar with the crypto space may not know about the benefits decentralization can bring.
Benefits of Decentralization
There are generally three major accepted benefits to decentralization, but I like to include an often-overlooked fourth.
- Security
- Control
- Anonymity
- Speed
Let’s break these down:
Security
This is one that’s often on traders’ minds when using an exchange. The reason is simple; exchanges where you deposit your crypto have time and again shown that they are not secure. As long as there have been crypto exchanges, there have been exchange hacks and fraud.
The 2014 hack of MtGox, at the time handling 70% of worldwide Bitcoin transactions, was the first major hack. Approximately 850,000 BTC were stolen, at the time worth over $450 million. In 2015 Poloniex was hacked for an undisclosed amount, resulting in all users having their balances reduced by 12.3%. In 2016 Bitfinex was hacked for 120,000 BTC, requiring the issuance of a “BFX” token to reimburse investors. Many Canadians will also recall the recent QuadrigaCX fiasco. $160 million of crypto assets were lost in late 2018 after the supposed death of the CEO, the only one with access to the deposits of its many users.
These of course are only the most major hacks. There have been thousands of smaller incidents of hacks, fraud, and mismanagement. The recent hack of Binance showed that every exchange is vulnerable, and it’s not a problem that’s going away any time soon.
These concerns about security are why many crypto traders will store their crypto in personal wallets rather than on exchanges, depositing to these exchanges only to rebalance their portfolios. As long as exchanges have access to hundreds of millions of dollars worth of crypto, they will always be a security risk. They are essentially multi-million dollar bug bounties.
Decentralization fixes this.
A decentralized exchange or application can be better compared to a farmers market.
Decentralization makes it such that there is no large pool of crypto just waiting to be hacked, and can be better compared to a farmers market. Customers at a farmers market enter with their funds in their own wallets, retain control the entire time there, transact with whomever they wish, and leave whenever they’d like. To rob a farmers market, a robber would need to pick the pocket of every individual rather than breaking into a central vault. This concept is core to what makes decentralization so much more secure than a centralized alternative.
Control
Not your keys not your crypto.
Depositing to a centralized exchange or application puts limits on the control of your assets, meaning a loss of many benefits of ownership.
Airdrops for free tokens based on ones you hold? Not if you have them deposited anywhere.
Voting rights associated with holding tokens? Given up as soon as you deposit those tokens.
How your tokens are stored, what they are being used to vote for, where receipts from airdrops go, what happens after a hack, and more are all up to whatever exchange or application you have them deposited with.
Giving up control was a sacrifice many made when blockchain and crypto tech was a burgeoning new tech. Centralization was a necessary evil to allow for early trading and use of early games and applications. A holdover from the previous financial system. However nothing is farther from Satoshi’s original vision for Bitcoin and blockchain than surrendering full control of your assets to a centralized authority and being completely at their whim.
Decentralization puts this power back into your hands.
To truly be your own banker and master of your assets, you need properly made decentralized applications. Luckily with the growth of the developer ecosystem these applications are starting to come to market, making decentralization a viable choice. We’re seeing the emergence of a suite of applications that work right from your personal crypto wallet, giving you maximum control.
Anonymity
Anonymity has been an element of crypto since Satoshi originally penned the Bitcoin whitepaper. Being able to securely transact with an anonymous other without the need for a third party is a major benefit of the technology.
Everyone has their own reason for wanting anonymity. Some live under oppressive regimes and have to keep their finances and online presence hidden. Others live in abusive situations. Still more don’t trust the way large companies handle their personal information. Regardless of the reason, many have moved to increase their personal privacy online in a time of ever growing online footprints and tracking.
Large centralized exchanges and applications will generally remove the option of anonymity, requiring pictures of government issued IDs, face identification, name, address, and more. The reasons are plentiful, from having to comply with local regulations to allowing for bank deposits to requiring some form of identification and accountability.
Decentralization returns privacy to the user.
Decentralization avoids many of the issues that cause centralized exchanges and applications to require significant identification from the user. You are instead identified by your crypto wallet. This wallet allows you to transact with others and prove ownership without needing to reveal personal information to the other party. With the growth in decentralized applications, you will soon be able to use the internet without surrendering all information about yourself.
Speed
Speed? On a decentralized exchange/application? How could that be possible?
Generally because of the limits of the blockchain, decentralized exchanges and applications have been seen as slower alternatives to centralized ones. Decentralized trade settlement takes longer, exchanges have lower throughput, and more. But I think that’s only half of the story.
Here’s an example.
Say I, as a crypto investor, wanted to make a quick trade to rebalance my holdings.
Using a centralized exchange
First I would have to log in and deposit to the exchange, which could take as long as 15 minutes for Ethereum. I can then make the trade, which takes only a moment if I place a market order or take the lowest sell order. After making the trade, I would then need to withdraw to my wallet again, waiting another 15 minutes.
All in all, that “quick trade” took me half an hour, even if the actual settlement of the trade was very quick.
Using a decentralized exchange
Compare that centralized exchange experience with something like Dolomite.
To begin I only need to connect my wallet, a process that takes a few seconds, maybe up to a minute if I need to do anything on my wallet manager. Placing a trade works essentially the same as on a centralized exchange and the trade is matched just as quick. However the settlement relies on the blockchain. As such if I wanted to wait for my trade to fill I’d have to wait an additional minute or two. After that, I simply close the webpage.
So while the actual settlement of the trade was quicker on a centralized exchange, the entire process took over 25 minutes less time on a decentralized exchange.
This is where I see an argument for the speed of decentralized exchanges and applications. The ability to access these applications is far higher than their centralized counterparts.
Conclusion
People who have become comfortable with their experience on centralized exchanges and applications have been quick to dismiss decentralized solutions. In some ways, they were right to. Many of the early ones were clunky, difficult to use, and had a small user base.
But what they saw was only the beginning.
Early decentralized exchanges and applications can be compared to early internet projects. They had to face the initial technical hurdles of building on new tech. As such, their applications are not as polished as ones that have been around for years built on many existing technologies.
However, with the growth in the developer community, the maturing of infrastructure projects, and the increase of users of decentralized applications, we are going to see ever more elegant solutions and platforms emerge. These applications will be more accessible than ever, provide greater security and control, and require less invasion of privacy than existing solutions. The greatest applications of this tech are ones that likely haven’t even been thought of or built yet, but every existing project, whether a success or a failure, paves the way to those future applications that will disrupt industries and connect the world in new ways.
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