For all the talk of decentralized exchanges changing the way coins and tokens are traded, no solution has yet to overcome the problems plaguing the idea. Yes, decentralized solutions to exchanges are arguably better than their centralized counterparts, and there are some good solutions already out there. However, no decentralized exchange has fixed the issues facing them, although second-wave exchanges, like ETERBASE, are well on their way to doing so.
Be careful what you call a decentralized exchange. It takes a thorough investigation to determine how decentralized an exchange is. About $270,000 was stolen from EtherDelta, a decentralized exchange, because its servers were still centralized – something that almost all users were certainly unaware of at the time. For decentralization to be effective, it must be used in all aspects of the business, from data storage to software.
Another issue presents itself when a decentralized exchange is owned by a centralized party, which, because of its ownership, subjects itself to anti-money laundering (AML) and know-your-customer (KYC) laws. Due to these regulations, users are required to share sensitive personal information – something that goes against the ethos of blockchain technology and decentralized governance.
What good is an exchange if there is no liquidity to conduct trades? Trading volumes for decentralized exchanges don’t even crack the top 50 of most traded exchanges, giving traders concern that they are not going to get the best price on their trades. Bancor, the most liquid decentralized cryptocurrency exchange, conducts less than $10 million in trades per day, a fraction of the billions of dollars of liquidity provided by other exchanges. When looking for the best prices and quickest trading options, it is still better to use centralized exchanges like GDAX or Binance than it is to switch to a decentralized exchange.
Unlike their centralized counterparts, decentralized exchanges have yet to find a way to provide easy-to-use interfaces and packages that anyone can use. Yes, the technically savvy investor understands how to use pegged tokens on exchanges like Waves, but most users will be worried about what it means to purchase a WBTC (Wave’s pegged bitcoin token), and whether it is equivalent to purchasing a BTC. Peer-to-peer exchange solutions, like Bisq, don’t have this problem but instead require users to transact offline – a time-intensive process that requires a great deal of trust between users to exchange fiat and cryptocurrency in a fair way. These are not ways the industry will grow into mass adoption, and these processes will need to be more streamlined and simpler to conduct transactions to attract more users.
The systemic problem of front-running exists on centralized exchanges and decentralized exchanges. Front-running occurs when any third party inserts an order ahead of previously pending orders on an exchange, with this third party most often being blockchain miners. Miners see transactions that are waiting to be confirmed in a block and insert their orders ahead of these pending orders, effectively manipulating coin prices along the way. Until this issue is solved, there will be many parties profiting from exchanges that fail to tackle this problem.
Dan is a freelance cryptocurrency and blockchain content writer. He has written content for startups, ICOs, financial planners, venture capital firms, and more. Previously he founded an e-commerce company that grew to $1 million in revenue and profitability in less than 3 years. Dan has a degree in Economics and Finance from Bentley University.