The Future of Decentralized Exchanges
Blockchain promised to help cut down the middlemen. However, cryptocurrency exchanges which are centralised have broken this promise. One of cryptocurrencies main characteristic is decentralisation, with no central body controlling it. The world started believing in cryptocurrencies given that governments and banks were controlling and manipulating fiat currencies
In came centralised exchanges which control cryptocurrencies similarly to how central bodies control fiat currencies. The hacks, the manipulation and the charges for listing a token have brought back the evils of the traditional banking system.
What makes the mix of a decentralised asset with centralised exchange even more dangerous is the fact that if a centralised exchange was affected by a hack, tracing back to the decentralised asset becomes tricky. Hence recovery becomes quite hard.
Similar to how people stopped trusting the traditional banking facilities, they are starting to lose hope on centralised exchanges. It is time for Decentralized Exchanges also called DEXes to take cryptocurrencies to the next level and help it survive in the long term.
Advantages of a Decentralized Exchange
Larger Trade Volumes — DEXes are far more practical concerning trading large volumes as it is more trustworthy as hacks are entirely out of the picture. Hacking a decentralised exchange will be of no use as critical information is not stored on centralised servers.
Adoption of New Digital Assets — Many centralised exchanges charge a hefty fee for listing, and so in a decentralised exchange, these listing charges are ineligible. Thus allowing new and exciting digital assets to be listed without initial costs which increase the likelihood of its growth.
Increased Fungibility- Fungibility can be described as the traceability of cryptocurrencies. With a cryptocurrency like Bitcoin you can easily trace and see who your Bitcoin’s once belonged to, which affects one of the main characteristics of cryptocurrency. With the notorious activities, Bitcoin is getting involved with such as illegal arms being bought can lead to a person holding BTC linked to the same deals. Maintaining fungibility for a crypto enthusiast is becoming more and more critical.
Disadvantages of a Decentralized Exchange
Not as User-Friendly- As of now, Cryptocurrency is not yet known to many across the world, and so with a centralised exchange a beginner can easily start trading in them. In a decentralised exchange, a beginner will get lost with the activities going on, and may eventually just give up on the idea of joining the cryptocurrency community. Thus decentralised exchanges may not help in the overall mission of cryptocurrency adoption.
Slow Transaction Speeds — As validation is required on the blockchain due to no central authority in the middle, it can take time for transactions to occur. Whether it be transferring cryptocurrencies or cancelling an order, it is all very slow.
Expensive — Certain decentralised exchanges may use gas and thus block confirmations can become costly. The overall cost per trade may increase thus disabling the primary motive for users to get in on the crypto train.
Not Completely Decentralized
There are a few decentralised exchanges such as IDEX which ensures that the speed and cost are reduced by using smart contracts to validate the transactions. However certain centralised features such as the functions for withdrawals act very similar to centralised exchanges. The button of withdrawal due to a backend command signs your transaction with an admin’s private key before being sent to the Blockchain.
Overall a 100% decentralised exchange with improved user-friendliness with speeds increased and costs reduced is still to exist. Cryptocurrencies may be technologically improving each passing day, however only once the adoption is drastically enhanced will decentralised exchanges become more critical. Until then the peer to peer nature with no ownership of keys needs to be maintained to become the go-to for more significant transactions.
To know more about Centralized and Decentralized Exchanges, and what to use explore our Cryptocurrency Community.