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cryptocurrency July 18, 2018

Are Decentralized Exchanges the Solution?

A decentralized cryptocurrency exchange, also known as a DEX, is a trading platform that does not hold investor funds. Instead, digital asset trades occur directly between the two transacting parties on a peer-to-peer basis and are settled on the blockchain.

Decentralized exchanges provide a degree of anonymity and personal financial sovereignty to traders as transactions are executed on a distributed ledger directly and there is no need for sign up documentation or identity authentication to use the platform.

Furthermore, decentralized exchanges can provide faster and cheaper transactions as no third-party is involved in the trading process. They are also much more difficult to hack as the potential attack vectors of decentralized exchanges are much less than for centralized exchanges.

Finally, several decentralized exchanges can also be easily integrated with hardware wallets such as the Nano Ledger S or Trezor for increased security. Users can send the cryptocurrency they want to trade directly from their hardware wallets to the smart contracts used to conduct the trade. That means that investors are always in control of their private keys and the risk of phishing attacks is significantly reduced.

Having said that, decentralized exchanges are not (yet) everyone’s cup of tea. Firstly, the majority of decentralized exchanges today are difficult to use. Having to trade using smart contracts can even be challenging for tech-savvy investors , let alone for beginners. Centralized exchanges, on the other hand, are set up in the same way as online stock brokerages, which most investors are already used to and comfortable with.

Secondly, decentralized exchanges currently come with limited features. For the most part, decentralized exchange only offer conversion from one digital token to another. Margin trading, stop-loss limits, and other useful functions are not available on today’s DEXs.

Thirdly, liquidity on decentralized exchanges is still much lower than on their centralized counterparts, which is perhaps the biggest deterrent for large investors to start trading on a DEX.

Probably the most popular decentralized exchange today is EtherDelta. EtherDelta uses Ethereum smart contracts to enable investors to buy and sell ether (ETH) and ERC20 tokens. The exchange has become particularly popular for ICO investors who want to trade ER20 tokens that are not listed on major cryptocurrency exchanges.

Perspective

While decentralized exchanges are on the rise, it is unlikely that centralized exchanges such as Binance, GDAX, and Kraken will disappear. For the time being, crypto investors are still content with taking on the risks of dealing on centralized exchanges in exchange for ease-of-use, liquidity, and convenience.

Source: ICO Alert

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