First and in brief: a decentralized exchange is a platform that provides a customer with the ability to buy or sell crypto from funds they control throughout the entire process. Alternatively, a centralized exchange requires a deposit of crypto to a wallet the customer does not control prior to trading. At the moment, the vast majority of non-OTC trades occur on centralized exchanges.
Here's the scoop: there is a lot of chatter among crypto traders that decentralized exchanges are lacking in terms of user experience, trading pairs, and liquidity. That said, from the private conversations I have had with many of these traders, the interest in the future success of decentralized exchanges is growing and folks are starting to dip their toes into the water.
I have posted previously about the promise that decentralized exchanges (in particular the 0x protocol) bring to the ecosystem. I had the opportunity to ask one of the top 'Relayers' -- a 0x term that basically means exchange operators -- what benefits decentralized exchanges provide over their centralized counterparts:
"Users maintaining custody of their tokens. User control mitigates many of the risks of using a centralized exchange such as hacks, shutdowns, or withdrawal latency. It also simplifies the process of token forks, contract updates, and airdrops. "
- Alan Curtis, CEO of Radar Relay in an email to The Blockchain Brief
If you've ever had your funds stuck or stolen on an exchange, what Alan just said resonates strongly. If you haven't, you should consider the risks:
Mt. Gox (USA) exploded into the void with the majority of customer funds.
Binance (Hong Kong) has had to move their IPs from country to country regularly to avoid regulators.
Straight from an interview with CEO Changpeng Zhao:
"In response to China’s decisions, we are moving our IP’s from Hong Kong to an offshore location. Now we have our IPs registered in BVI ( British Virgin Islands) and other locations. So we are registered in multiple locations and we have people in multiple locations. That way we will never be affected by one regulatory body."
Rock solid plan!
Huobi (China/HK) requires a passport verification to withdraw more than 0.1 BTC at a time. But unlimited deposits, of course.
Bittrex (USA) isn't accepting new customers. For months now.
BitGrail (Italy) just completely screwed their customers, lost $150M and blamed a hack. Was it really?
CoinCheck (Japan) just lost $530M worth of NEM. Because it was stored in a hot wallet.
And finally, who knows what Bitfinex is doing with all of that Tether…
Custodianship of your own crypto-assets is not a joke, and as one well-versed friend of mine put it, "I would give people who hold all their assets on a digital wallet or exchange an almost 100% chance of losing some of it within a period of a few years."
Okay, so you're probably convinced at this point that DEXs can have significant security benefits for crypto trading. The issue, as many know, is that DEXs have struggled with liquidity -- literally being able to fulfill buy/sell trades in a timely manner, and with prices that at least somewhat match those on centralized exchanges.
I spoke to an upcoming Boston-based decentralized exchange (appropriately named "DEX") about the liquidity problem.
The answer:
"Whereas centralized exchanges have a central body limiting access to the exchange, decentralized exchanges are open protocols that can accommodate trades with no limitation in size and volume that is only limited by the throughput of the blockchain. Even with that limitation, people all over the world are working on scaling blockchains. That work will greatly expand the throughput of decentralized exchanges. In the coming months and years, we will see decentralized exchanges grow greatly in liquidity."
- Andrew Rollins, Co-Founder of DEX in an email to The Blockchain Brief
My interpretation of this comment is as follows: as DEXs become easier to use, the ability to execute huge trades (without giving up custody of your assets) will create a feedback loop where larger and larger trades occur on decentralized exchanges. And large trades bring new traders to the platform, because they create liquidity.
A final important question I asked both Radar Relay and DEX was in regards to ICOs on decentralized exchanges. Companies working on an initial coin offering often partner with exchanges to provide liquidity to early and new investors. As of this moment, most of these ICOs occur on centralized exchanges like Binance -- who take a massive percentage of tokens just to list them on their exchange.
Will decentralized exchanges list ICOs?
“We aren't partnering with token issuers, but exciting projects often reach out early in their journey. We strive to add them as soon as we can without compromising our regulatory strategies.”
- Alan Curtis, CEO of Radar Relay
Yes. We will work with the top notch tokens and ICOs to bring them and their communities the liquidity they need to utilize the tokens. For us, "top notch ICOs" means ICOs that act in good faith with their community to deliver on their roadmaps and provide transparency with their users. We are particularly interested in supporting tokens with real network value and meaningful use cases (for example, storage networks like Sia). For those kinds of tokens, the support of credible, professional exchanges will be critical for their networks to grow.
- Andrew Rollins, Co-Founder of DEX
The Blockchain Brief is going to continue to track the development and scale of decentralized exchanges, and expect us to be back with more updates from the front lines. Stay tuned.