How Reliable is The Decentralized Exchange? The Advantages & Disadvantages
In this piece, I am going to explain the advantages of decentralized exchange and how it is going to be a profitable future for cryptocurrency.Pratip Biswas
The decentralized exchange has become quite a rage among the crypto enthusiasts these days. Even the crypto pundits have termed the year 2019 as the "Year of Decentralized Exchange".
But is the time has really come for the normal user's perspective to say this is the hour of the day?
Let us shed some limelight on this aspect
Decentralized Exchange gradually came into the picture from 2017 but why suddenly within these 2 years it has become the cynosure?
Issues With Centralized Exchanges
What happened to the centralized exchanges? Let us find some concerns from the user perspective why the centralized exchanges lost its ground to its competitor named as the decentralized exchange.
The first and foremost thing behind this sensational rise behind the decentralized cryptocurrency exchange is the security loopholes associated with the centralized exchanges.
These security loopholes are always a point of concern for normal users. And it has become an open secret to normal users after the Mt Gox and Coinheck in the year 2014 and 2018 respectively.
Risk of Identity and information theft:
Any centralized exchange around the globe do not allow the user to trade without proper KYC verification which includes the documents in support of their identity (e.g.: Passport, Scanned photograph etc). There are massive risks such as identity theft which is associated with the user's perspective since they are sharing their personal details with a third party.
All the centralized exchanges are exposed to problems like the server downtime, maintenance etc. The centralized exchanges needed proper services after running for a while so that they work in a flawless manner.
Risk of banking information theft:
There are a lot of centralized exchanges which takes the account details from the users at the time of KYC for fiat to crypto exchange and vice versa. Sharing that confidential information from the user perspective becomes very risky if those details are stolen from the centralized exchange.
Misleading normal user through wash trading:
The liquidity is the key component is associated with an exchange and without the liquidity, no exchange can run. A lot of centralized exchange owners follows the wash trading mechanism to attract users in their exchanges. The wash trading is nothing but a fraudulent and misleading activity through which an investor can place a sell order, then place a buy order to buy from himself, or vice versa.
What is Decentralized Exchange and How it is Different!
The only way to overcome this chaotic situation is to use the decentralized exchange. Let me tell you what a decentralized exchange is:
A decentralized exchange abbreviated as DEX is an exchange which does not use any third party wallet services to store the cryptocurrencies of the user.
Normally the centralized exchange uses the concept of hot wallets (The wallets which are directly connected with the internet) and cold wallets(The wallets which are not connected with the internet).
Obviously, the hot wallets are more prone to hacking since it is connected with the internet. If the centralized exchange is hacked then simultaneously the hacker will get access to all the keys of the wallets of the users and the exchange funds are gone within a second!
To overcome this phenomenon the concept of decentralized exchange came into the picture.
If we envisage a picture where the user can access their funds stored in their hardware wallets or PC the user would feel very safe about their account. Even if we can say that user account gets hacked but it wouldn't lead to mass destruction where every wallet is associated with the exchange would be at stake.
In the decentralized exchange environment, user has their own key and it is stored in a much safer environment.
Some Of The Top Grossing Decentralized Exchanges Ruling The Market
Let us just go through some of the best-decentralized cryptocurrency exchanges which are available in the market. I will also give a synopsis on what protocol they are using, what kind of blockchain has been used in those platforms and what are the advantages and disadvantages associated with it.
Built on: Komodo Blockchain
Technology/Protocol: Iguna core
Supports atomic swaps/ Cross chain trading[Atomic swap is a service where one user can exchange their cryptocurrencies with other users without any third party exchange. They can be executed between different blockchains on any native coins or they can be executed on off chain channels of the main blockchain.
The UI (User Interface ) of the exchange is not that user-friendly.
Built on: Neo Blockchain
Technology/Protocol: Off-chain matching
One of the main disadvantage associated with the decentralized exchange is the speed. Nash is comparatively faster than its competitors.
It is relatively new in the market so not quite tried and tested.
3. Waves DEX:
Built on: Waves Blockchain
Technology/Protocol: Waves Protocol
One of the main advantages associated with this decentralized exchange is the addition of the custom tokens through plugins. This makes it one of the flexible decentralized exchanges available in the market.
Since Waves DEX allows custom token creation and addition, there are chances of drawbacks when someone is using low liquidity and highly volatile tokens.
Built on: Ethereum Blockchain
Technology/Protocol: IDEX Protocol
-The exchange balance updates in real time
-The exchange’s architecture design allows users to trade continuously across multiple markets without waiting for transactions to mine. It helps users to place true market orders and fill multiple orders in one shot and cancel orders without any gas costs.
Only supports ERC 20 tokens.
5. Open shares DEX
Built on: Bitshares Web wallet & Open shares DEX
-The exchange allows access to deposit, withdrawal and storing of both crypto and fiat funds.
-The exchange support storing, sending and trading of around 125 cryptocurrencies with 63 pairs.
-Allows withdrawing of new currency to other exchanges.
Fees structure is a bit high.
How Decentralized Exchange Got a Competitive Edge Over Centralized Exchanges
Got information on the popular options? Let’s find out what are the advantage of Decentralized exchanges over its counterpart centralized exchanges
Top notch Security:
One of the biggest advantages of Decentralized exchange over centralized ones is the security which it posses. The Decentralized exchange does not depend on any third party services. The entire control of the wallet remains in the hands of the users.
No Risk of Identity and information theft:
Users who want to trade in decentralized exchanges don’t have to submit the government proofs like (e.g.: Passport, Driving License) etc. So the users don’t feel the headache of losing the confidential info while registering for trading in decentralized exchanges.
No Infrastructure Risk:
The decentralized exchange doesn't have any kind of infrastructural risk while executing trade orders.This uniqueness allows the user the flexibility to trade anytime without any major headache.
No Risk of banking information theft:
As decentralized exchanges only work through cryptos so there is no risk of sharing banking information over decentralized exchanges.
No Risk in Government shutdown:
The government can’t interfere in Decentralized exchanges so the government can’t take any drastic action against any decentralized exchanges.
Every transaction associated with the decentralized exchange is entirely anonymous and every transaction is being verified and validated by the almighty Blockchain “smart contract”. So the privacy of the transactions treated in the most deserving way.
Decentralized exchange is a new phenomenon under the Blockchain phenomenon but still, it has to go a long way before it can stamp its entire authority over the trading market. There is no denying the fact that it is highly popular among the crypto enthusiasts and a lot of top-notch centralized exchanges and market leaders in the trading market are launching its own decentralized exchanges (e.g.: Binance has already launched its decentralized version, Airswap has also done it).
If in the coming days apps on decentralized exchanges or websites can ease their usage and offers more flexibility to the normal users with minimum technical knowledge just like centralized exchanges it would reach a new horizon for sure!