Future aspects of Decentralized Exchanges
Technology that we know today has evolved at an interesting stride in the last decade, and what used to be spoken about as being futuristic and impossible to understand has now become a part of our everyday life and has been destined to change the operations of humans both personally and at their workplace. One such technological revolution ever happened over the global front is the blockchain revolution that has been successful in upbringing the essence of privacy and sovereignty back to people and cutting out the middleman. Blockchain-based applications such as digital assets (i.e. digital currencies, and tokens) are decentralized, meaning there is no central authority involved in manipulating or dictating its rules or signing and approving a transaction, makes it impossible to be hacked. The decentralization of this technology is the primary reason it’s a prime candidate for being one of the pillars of the fourth industrial revolution, granting ownership back to users by facilitating peer to peer transactions, which is especially useful for trading in terms of digital currencies.
But, there is another side of the picture, though blockchain promises user-end security; Digital assets exchanges introduce different vulnerabilities making digital assets the new Wild West. Hacks from millions of dollars to billions of dollars across the globe are possible. The exchange of digital assets is mostly conducted on centralized exchanges, this is a recipe for disaster to exchange decentralized tokens, essentially paralyzing the mainstream adoption of this new money meant for the global population.
The limitation of Centralization: Challenges and Solution
In a situation when bank accounts are hacked and consumer(s) assets are robbed, usually the bank is liable to pay back the stolen assets to its concerned owner(s), as those assets are reasonably owned by that bank and both are essentially centralized. However, if decentralized assets get hacked by busting a centralized server, those assets are more difficult to be traced and recovered. Centralized exchanges that work by safekeeping the private keys to those assets in their servers that essentially mean they own those keys. Therefore, this raises the risk of insider threats in addition to outsider hacks and breaches.
Recounting over this, Blockchain which was built to transform the trust of a centralized authority to the trust of no authority by leveraging computation using decentralized distributed nodes failed to keep its promise, because digital currency exchanges which are centralized controls the digital currencies in an exact way as the central bodies control fiat currencies and thereby defy the main purpose of this technology. Further, the mix of a decentralized asset with centralized exchange makes things even more dangerous because a centralized exchange affected by a hack traces back the decentralized asset making recovery quite hard. The hacks, the manipulation and the charges for listing a token bring back the evils of the traditional banking system, which is further taking over the people’s trust over the centralized exchanges. Henceforth, it is the time for Decentralized Exchanges also called DEXes to take digital currencies to the next level and help it survive in the long term.
Advantages of a Decentralized Exchange
Larger Trade Volumes
DEXes are exceptionally better concerning trading large volumes as it is more trustworthy as hacks are entirely out of the system. Further, in case of hacking is accomplished by any manner, it will be of no use as critical information is not stored over the centralized servers.
Adoption of New Digital Assets
Listing over centralized exchanges has never been that easy as it charges a hefty fee for being listed. In contrast to this, listing charges over the decentralized exchange is zero. Thus, it allows new and exciting digital assets to be listed without any initial costs which thereby increase the likelihood of its growth.
Increased Fungibility
Fungibility is usually defined as the traceability of digital currencies. With a digital currency like Bitcoin, one can easily trace and fetch details over the complete ownership details of the Bitcoin, which eventually affects one of the main characteristics of digital currency. Thus, maintaining fungibility for a digital enthusiast is becoming more and more critical.
Disadvantages of a Decentralized Exchange
Since every technological platform has its own pros and cons. Keeping a note of only the advantages associated with the DEXes would be unfair. So, that has a look over some of the limitations of this mode of exchange.
Not as User-Friendly
Since Digital currency has not yet been introduced in all parts of the world; there is still a huge population who is unaware of all the aspects of digital currency. This is the reason why centralized exchange has gained more popularity as a beginner can easily start trading in them in comparison to the decentralized exchange that seems a bit difficult to go with for a beginner who thereafter, just gives up on the idea of joining the digital currency community. Thus decentralized exchanges may not help in the overall mission of digital currency adoption.
Slow Transaction Speeds
Due to the absence of central authority in the middle, validation is required on the blockchain; which consumes more time for transactions to occur. Whether it be transferring digital currencies or canceling an order, it is all very slow.
Expensive
Certain decentralized exchanges use block confirmations at each stage of the process which thereby, increases the overall cost per trade and thus disables the primary motive for users to get in on the digital chain.
Restriction of trade
Another thing to note about the decentralized digital currency exchanges is that there is some restriction of trades on a single blockchain. And surprisingly, almost all of the most promising DEXs and protocols which are yet to make its presence in the global space are looking to solve this problem. Neo smart contracts are one of the best examples which are working behind to create applications that support atomic swaps across different blockchain.
How far we have reached in adapting DEXs?
Most of the market participants are short-term traders, who are not usually holding all of their funds in cold storage due to extremely low volumes and lack of cross-chain trading relationships. But, so far we have been witnessing the emergence of many decentralized exchanges (DEXs) in the global space like IDEX, Digital Bridge or Bisq which preferably supports the trading of ERC20 tokens.
Decentralized Exchanges and the protocols that have been built so far have seen huge strides in the last couple of years having a lot of issues that a general purpose blockchain use-case faces like scalability, slow-adoption, and volatility. Most of these issues stem from the fact that a large number of claiming-to-be “Decentralized” exchanges were either hidden behind centralized back-end systems or were merely pretending to be “decentralized” in the future. However, things have gotten a lot better when it comes to decentralized exchanges in recent times, as for now it has been realized that the atomic swaps, which is termed as exchange of digital currency A for Digital currency B without any centralized/custodian intermediaries being involved could help solve the issues being faced, though it’s still in developing phase it has gained considerable traction in the recent times.
It takes place directly between the blockchain of the two concerned currencies or even at the wallet level without any kind of dependence whatsoever on a third party or an escrow manager along with zero risks of any participant defaulting on the trade that thereby makes the idea of Atomic Swaps promising. Another solution to roll out faster DEXs is the Plasma Protocol wherein the performance of DEXs can be enhanced to match the throughput of a centralized exchange, while simultaneously ensuring safety of assets by using a hierarchical state channel approach towards the root chain, dApps & sidechains along with an extra implementation of zero-knowledge proofs (L2 scaling)
Summing up to these aspects, we may infer that the development and enhancement of Decentralized Exchanges (DEXes) are essential for the true survival of digital assets. Centralized exchanges which once ruled the global trading market by being considered as one of the dominant means to exchange decentralized digital assets are getting a thing of old time now due to the repeated hacks and security breaches, thereby, bringing a sense of lack of trust into the ecosystem. Practical DEXes with the same or better functionality than centralized exchanges may bring in larger trade volumes, and as hacks start to diminish provided that decentralized exchanges do hold any critical information over the centralized servers. This in turns will facilitate the adoption of this new class of assets. DEXes are a further significant component for an increased degree of fungibility in digital currencies. Further, the development of DEXes may not introduce fully autonomous features at least for the foreseeable future. However, it’s critical for the DEXes to keep transactions purely peer to peer and stay away from storing the ownership keys (private keys) of digital assets in a centralized fashion. And if at all possible they should also reduce the transaction speed and gas cost of each trade which would eventually bring it more space.
Thus, the rise of decentralized digital exchanges is still slow and needs some more time in being accepted worldwide thereby, full-scale application of DEXs is going to take time and patience.
