Despite the fact that the whole philosophy of the blockchain technology is based on the idea of universal decentralization and liberation from the control of large institutions over day-to-day operations, centralized whales dig in the heart of the industry – all major cryptocurrency exchanges are centralized.
There’re 227 exchanges listed on Coinmarketcap.com today, and up to 500 according to independent experts estimation. Today, decentralized exchanges are becoming increasingly popular, the biggest one, IDEX, occupies 88th line in the ranking by trade volume at Coinmarketcap.com. Let’s try to understand what they are and what key features distinguish them from the usual centralized exchanges.
What are decentralized exchanges (DEXs)?
A decentralized exchange allows users to communicate directly using peer-to-peer trading, cutting the middleman out. Traders have full control of their money without having an exchange provider store and trade these funds for them. All trades are made using smart contracts.
DEXs are usually hosted on a network of distributed nodes that both increase safety (less possible hacks) and server downtime solution (redistributed power). DEXs are supposed to be open and transparent.
DEX vs centralized exchange
There’re 4 functions that determines a crypto exchange:
- capital deposits,
- order books,
- order matching,
- asset exchange
Usually in most exchanges only asset exchange is decentralized as the asset itself (a crypto currency) is decentralized and not controlled by anyone. But the remaining 3 functions are centralized, moreover there are such requirements as KYC (know your customer) and AML (Anti-Money Laundering) protocols, that requires centralized storage of users’ data.
The main difference of DEX is that it allows trustless transactions, you don’t have to allocate your funds at an exchange, you fully control them yourself. On a centralized exchange you need to load some funds to an exchange wallet to start trading and then you don’t fully control your assets until you withdraw them to your personal wallet. On a decentralized exchange there’s no need in middleman because of peer-to-peer transaction system. DEXs also offer minimal fees compared to centralized platforms. Decentralized exchanges also allow users to maintain their privacy and trade without disclosing all their personal details.
DEX Pros and cons
- You are fully in control of your funds and actions
- No third party involved
- Privacy control
- Reduced server downtime risks
- Lower fees
- Possible increase of trading speed (cross-chain trading options)
- No limits for transactions
- No government regulation involved
- More difficult to study out for new users
- Not as easy to convert fiat to crypto as on a centralized exchange
- Less currency options
- Less liquidity
- Not so fast customer support
- Lack of regulation and customer protection
TOP-5 decentralized exchanges right now
Idex was launched in 2017 and confidently takes 1 line in terms of transaction volume, supporting more than 200 ERC-20 based tokens. Idex is on 88 place in Coinmarketcap rating by 24h adjusted volume, the volume (as for October 2018) is 511 BTC.
2. Token store
Token store supports the trading of any ERC20 token by contract address: tokens don’t have to be listed anywhere for them to be traded. Token store is on 186 place in Coinmarketcap rating by 24h adjusted volume, the volume (as for October 2018) is 3.62 BTC.
DEx.top uses a replayed-on-chain trading mechanism, which uses the on-chain and off-chain synchronized ledgers to allow instant trading while protecting the assets of the trader.
DEx.top is on 167 place in Coinmarketcap rating by 24h adjusted volume, the volume (as for October 2018) is 19.12 BTC.
4. Ether Delta (Fork Delta)
Ether Delta is a peer-to-peer platform that has more than 241 coins and tokens listed. Ether Delta is on 143 place in Coinmarketcap rating by 24h adjusted volume, the volume (as for October 2018) is 69.24 BTC.
Bancor is essentially a blockchain protocol that is designed to bring liquidity to tokens that are lacking a consistent supply and demand in conventional exchanges. Bancor is built upon smart contracts and a novel class of cryptocurrencies known as “Smart Tokens”. Smart tokens make it possible for direct internal conversion of different ERC-20 tokens.
Bancor is on 105 place in Coinmarketcap rating by 24h adjusted volume, the volume (as for October 2018) is 69.24 BTC.
Decentralized exchanges represents a new trading approach with lots of obvious advantages with a very promising future. But they have lots of issues to work on, they definitely need to improve usability. Another important problem is that we still don’t know how state institutions and regulators will perceive this new concept.