Decentralized P2P Crypto Exchanges (DEX): What’s New?
Even though centralized exchanges are accessible and relatively easy to use, they also always include a certain element of risk. All the existing exchanges differ in terms of security. Hacker attacks are not rare in the world of cryptocurrencies, and some of them cause a considerable damage to many users. For example, the Bitfinex hack made thousands of users lose their Bitcoins worth $60 million and caused a 20% decline in the price of Bitcoin. Some exchanges are itself malicious so everyone who trades cryptocurrencies understands the associated risk.
The idea of a Decentralized Exchange (DEX) is based on the fact that an exchange doesn’t need to rely on any third parties that would keep the customers’ money. Users can trade with each other directly, using the automated peer-to-peer mechanism. Such systems become possible thanks to proxy assets or tokens that represent shares in a business or cryptocurrencies. There are also other solutions, like multi-signature escrow systems. Unlike the centralized model, decentralized exchanges don’t require users to deposit their money.
Advantages and Disadvantages of Decentralized Exchanges
Let’s start with advantages:
- Coins are safe on a decentralized exchange, as most of such platforms are just P2P trading places. They don’t store cryptocurrency tokens so there’s no need to worry about hackers stealing your money by attacking the exchange.
- Another advantage of DEX is that decentralized exchanges cannot be effectively regulated by laws of any country. There are many countries where cryptocurrencies are illegal and centralized exchanges can be easily shut down. Decentralized exchanges are much harder to control.
- Although most exchanges require their users to create an account to be able to trade, centralized and decentralized exchanges differ in their security approaches. When registering on a centralized exchange, users must confirm their identities, while most decentralized exchanges allow them to create an account using any name or nickname. Thus, the latter are certainly safer in terms of privacy.
Although decentralized exchanges offer many benefits, they also have some drawbacks.
- Firstly, DAX are slow, many of them don’t have friendly user interfaces and your transaction can be postponed because of bugs in the system. It can be easily explained by the early age of decentralized technologies, so many problems in scalability haven’t solved yet.
- Secondly, centralized exchanges are still more popular so they are more active and have more traders involved. Centralized exchanges also exceed decentralized ones in terms of customer support and user experience.
- Most people choose decentralized exchanges to avoid government regulations. These exchanges are based on a principle of anonymity, which is a reason why the identities of their founders are also unknown. Anonymity itself is not bad in case of a well-known company that receives positive feedback. However, small companies that appeared not so long ago and keep their founders’ names in secret should trigger concerns. They can be either reliable exchanges or a scam, and nobody knows it for sure.
- Although the lack of regulations is one of the main factors that attract users, it also has its flip side. Users of decentralized exchanges cannot count on any third parties if something bad happens or if an exchange suddenly goes down.
- All the factors above make decentralized exchanges less appealing to investors. Most people choose centralized exchanges which are approved by the government and can offer good customer support.
Main Problems of Decentralized Exchanges
As you can see, decentralized exchanges are still far from perfect, and there are a few reasons why they have problems with gaining popularity. For instance, transactions may take a lot of time because when they are recorded in a blockchain, they should be validated. The Bitcoin blockchain may require you to wait more than 10 hours until your transaction is validated.
Another issue that may stop traders is that it’s still impossible to make transactions between different blockchains on decentralized exchanges. This means that if you deal with an Ethereum-based exchange, you can trade only Ethereum-based tokens. Completely decentralized systems don’t allow people to trade such pairs as ETH/BTC, BTC/USD, LTC/BTC, etc. because they cannot transfer data between different types of blockchains. Projects like BTC Relay address this issue, however, they remain at the development stage.
Decentralized exchanges also demonstrate low liquidity. The inconvenience of trading systems, fees, and a small range of available currencies lead to a small number of orders placed. In addition, according to Coinmarketcap, intra-chain transactions make less than 2% of all transactions.
List The Most Popular DEX
This platform is used specifically for Ethereum and ERC-20 tokens. The interface of this platform looks sophisticated, however, people who have a background in trading currencies will quickly get used to it. The main advantage of this platform is that here you can trade virtually any kinds of ERC-20 tokens, which is a reason why this platform has earned many positive reviews. On the other hand, the trading process is rather slow, and many instruments show low liquidity.
IDEX was created in 2017, and now it’s one of the most popular DEX platforms. It supports more than 200 types of tokens, however, Ethereum and ERC-20 tokens are the most common. This exchange also has many interesting features, such as market orders, instant order books, and gas-free cancels.
Developers of IDEX put a lot of effort into ensuring a high speed of transactions, and 24-hour trade volumes here reach $3.5 million. Recently, IDEX became a partner of the WINGS foundation, so now ICOs from WINGS can easily enter IDEX. This exchange has a convenient interface and is one of the most accessible solutions to date.
- Waves DEX
This exchange is a part of the Waves platform. It’s mostly focused on new crypto projects and ICOs. Waves DEX combines decentralized and centralized approaches, using a centralized matching mechanism in order to make transactions faster. Users can trade Bitcoin, Ethereum, Litecoin, Zcash, and many other coins based on the Waves platform. Users can also create and distribute their own crypto assets and trade them here. The 24-hour trade volume reaches $5 million.
- Stellar DEX
This project was launched in 2014 by one of Ripple co-founders, Jed McCaleb. This decentralized system supports cryptocurrencies like Ethereum, Bitcoin, Litecoin, and Ripple, as well as such fiat currencies as USD, JPY, HKD, and CNY. A feature called ‘atomic pathfinding’ allows users to find the cheapest pair automatically. The 24-hour trade volume is usually about $300,000.
To start trading, users must join the Stellar network and create a key pair, which consists of a Secret key and a Public key. After this, you need to deposit 20 lumens to activate the account.
Bancor is different from other exchanges because it doesn’t have problems with liquidity, unlike many other DEX platforms. It doesn’t rely on a traditional bid/ask approach and doesn’t use P2P transactions to match buyers and sellers. Instead, users can sell or buy directly from their Bancor wallets. This platform also allows users to exchange money from a credit card to crypto. The 24-hour trading volume reaches $1 million.
Although decentralized exchanges still cannot compete with the centralized ones in terms of customer support and usability, they are a great solution for people who value their privacy and don’t want to store their money in centralized systems which are prone to hacker attacks. There are several serious issues that prevent DEX systems from gaining popularity, but developers and enthusiasts constantly look for new solutions. The very nature of blockchain and cryptocurrencies is all about decentralization, so these exchanges are certainly worth giving a try.