Decentralized exchange: Difference between revisions
Content deleted Content added
Reverted good faith edits by 2A02:1811:AC02:C900:C980:FE98:D3F4:56D3 (talk) |
unify "Decentralized finance" and "Decentralized exchange" Tags: New redirect 2017 wikitext editor |
||
| (40 intermediate revisions by 22 users not shown) | |||
| Line 1: | Line 1: | ||
#REDIRECT [[Decentralized_finance#Decentralized_exchanges]] |
|||
[[File:Switcheo ledger.png|thumb|Ledger login on Switcheo Exchange|alt=]]'''Decentralized exchanges''' ('''DEX''') are a type of [[cryptocurrency exchange]] which allows for direct [[peer-to-peer]] [[cryptocurrency]] transactions to take place [[online]] securely and without the need for an [[intermediary]].<ref name=":0">{{Cite web|last=Wong|first=Joon Ian|title=Coinbase bought a “decentralized” crypto exchange. How does that work?|url=https://qz.com/1289262/what-are-centralized-and-decentralized-cryptocurrency-exchanges/|access-date=2020-12-03|website=Quartz|language=en}}</ref> |
|||
== Overview == |
|||
In transactions made through decentralized exchanges, the typical third party entities which would normally oversee the security and transfer of [[Asset|assets]] (e.g. [[Bank|banks]], [[Stockbroker|stockbrokers]], online [[payment gateways]], government [[Institution|institutions]], etc.) are substituted for a [[blockchain]] or [[distributed ledger]]. Some common methods of operation include the use of [[smart contracts]] or order book relaying, although many other variations are possible and with differing degrees of [[decentralization]].<ref name=":0" /><ref>{{Cite news|date=2017-09-28|title=This 31-Year-Old Is Trying to Revolutionize Cryptocurrency Trading|language=en|work=Bloomberg.com|url=https://www.bloomberg.com/news/articles/2017-09-28/upending-digital-currency-market-is-next-act-for-ex-virtu-trader|access-date=2020-12-03}}</ref> |
|||
Because users do not need to transfer their assets to the exchange, decentralized exchanges reduce the risk of theft from [[Cryptocurrency and security|hacking of exchanges]].<ref>{{Cite news |url=http://www.digitaljournal.com/business/big-investment-in-cryptocurrency-startup-altcoin-io/article/531556 |title=Big investment in cryptocurrency startup Altcoin.io |last=Sandle |first=Tim |date=2018-09-09 |work=Digital Journal |access-date=2018-09-11}}</ref><ref>{{Cite news |url=https://www.wsj.com/articles/alexis-ohanians-vc-firm-invests-2-1-million-in-crypto-trading-platform-1520365270 |title=Alexis Ohanian’s VC Firm Invests in Crypto Trading Platform |last=Castellanos |first=Sara |date=2018-03-06 |work=Wall Street Journal |access-date=2018-09-11 |language=en-US |issn=0099-9660}}</ref> Decentralized exchanges can also prevent price manipulation or faked trading volume through [[wash trade|wash trading]], and are more anonymous than exchanges which implement [[know your customer]] (KYC) requirements. |
|||
There are some signs that decentralized exchanges have been suffering from low trading volumes and [[market liquidity]].<ref name="wsj">{{Cite news|last=Russolillo|first=Steven|last2=Jeong|first2=Eun-Young|date=2018-07-16|title=Cryptocurrency Exchanges Are Getting Hacked Because It’s Easy|language=en-US|work=Wall Street Journal|url=https://www.wsj.com/articles/why-cryptocurrency-exchange-hacks-keep-happening-1531656000|access-date=2018-09-11|issn=0099-9660}}</ref> The 0x project, a protocol for building decentralized exchanges with interchangeable liquidity attempts to solve this issue.<ref>{{Cite news|url=https://techcrunch.com/2018/07/16/0x/|title=0x lets any app be the Craigslist of cryptocurrency|work=TechCrunch|access-date=2018-11-24|language=en-US}}</ref> |
|||
== Drawbacks == |
|||
Due to a lack of [[Know your customer|KYC]] process, and no way to revert a transaction, users are at a loss if they are ever hacked for their passwords or private keys.<ref>{{Cite web|url=https://www.bloomberg.com/news/articles/2018-01-30/record-crypto-heist-raises-the-appeal-of-a-new-type-of-exchange|title=Bloomberg - Record Crypto Heist Raises the Appeal of a New Type of Exchange|website=www.bloomberg.com|access-date=2018-11-17}}</ref> |
|||
Although liquidity pool DEX are the most widely used, they may have some drawbacks. The most common problems of liquidity pool DEXes are price slippage and [[front running]]. |
|||
'''Price slippage''' occurs because of the AMM (Automated Market Makers) nature itself — the larger the deal, the stronger impact it has on the price. For example, if the constant product AMM is in use, every deal must keep the product xy = k constant, where x and y are quantities of two cryptocurrencies (or tokens) in the pool. So the larger is the input amount Δx, the lower is the final ratio y / x that gives an exchange price. The problem is mostly significant for large deals or small liquidity pools. |
|||
'''Front running''' is a special type of attack in public blockchains when some participant (usually a miner) seeing an upcoming trading transaction puts his own transaction ahead (playing with a transaction fee for example), making the initial transaction less profitable or even reverted. |
|||
Ideas of improving front running resistance of the constant product AMM were first discussed in the post of Vitalik Buterin.<ref>{{Cite web|url=https://ethresear.ch/t/improving-front-running-resistance-of-x-y-k-market-makers/1281|title=Improving front running resistance of x*y=k market makers|website=Ethresear.ch|language=en-US|access-date=2021-01-27}}</ref> A possible solution is to allow operations that are not completed immediately, but last for some period (e.g. 5 minutes), during which the liquidity is gradually moving to and from the pool without price bouncing. This removes the front running problem, as front runners cannot benefit from long operations. This also helps against the price slippage as arbitrageurs and other traders will be able to act in parallel, making counter-deals that compensate each other.<ref>{{Cite web|url=https://medium.com/liquifiorg/liquifi-a-new-liquidity-pool-dex-that-is-a-golden-cut-for-the-price-slippage-and-front-running-2bbdc5cccfc5|title=Liquifi: a New Liquidity Pool DEX that is a Golden Cut for the Price Slippage and Front-running Problems|website=Medium.com|language=en-US|access-date=2021-01-27}}</ref> |
|||
== Degrees of decentralization == |
|||
A decentralized exchange can still have centralized components, whereby some control of the exchange is still in the hands of a central authority. A notable example being IDEX blocking New York State users from placing orders on the platform.<ref name=":1">{{Cite tweet |user=Aurora_dao |number=1054917418621984768 |date = 23 Oct 2018 |title= #IDEX will begin blocking new orders from users with New York State IP addresses on Thursday, October 25th (6pm UTC). Cancels and withdrawals will remain active. }}</ref> |
|||
In July 2018, decentralized exchange [[Bancor (cryptocurrency)|Bancor]] was reportedly hacked and suffered a loss of $13.5M in assets before freezing funds.<ref name="bancor-freeze-loss">{{Cite web|url=https://www.zdnet.com/article/another-hack-rocks-cryptocurrency-trading-bancor-loses-23-5-million/|title=Another hack rocks cryptocurrency trading: Bancor loses $13.5 million|last=Osborne|first=Charlie|website=ZDNet|language=en|access-date=2018-12-13}}</ref> In a Tweet, [[Charlie Lee (computer scientist)|Charlie Lee]], the creator of [[Litecoin]] spoke out and claimed an exchange cannot be decentralized if it can lose or freeze customer funds.<ref>{{Cite web|url=https://techcrunch.com/2018/07/10/bancor-loses-23-5m/|title=The crypto world’s latest hack sees Bancor lose $23.5M|website=TechCrunch|language=en-US|access-date=2018-12-13}}</ref> |
|||
Operators of decentralized exchanges can face legal consequences from government regulators. One example is the founder of EtherDelta, who in November 2018 settled charges with the [[U.S. Securities and Exchange Commission]] over operating an unregistered securities exchange.<ref>{{Cite web|url=https://www.reuters.com/article/us-etherdelta-sec/sec-etherdelta-founder-settle-charges-over-operating-unregistered-exchange-idUSKBN1ND2CC|title=SEC, EtherDelta founder settle charges over operating unregistered exchange|website=Reuters|language=en-US|access-date=2018-06-05}}</ref> |
|||
== Decentralized Exchanges == |
|||
There are upwards of 35 decentralized exchanges - built on different blockchains - and the market is growing quickly.<ref>{{Cite web|date=March 25, 2021|title=What Is a Decentralized Exchange (DEX)?|url=https://www.gemini.com/cryptopedia/decentralized-exchange-crypto-dex|url-status=live|website=Gemini Cryptopedia}}</ref> [[Uniswap]], which is built upon the [[Ethereum]] blockchain, has the largest trading volume of any DEX.<ref>{{Cite news|last=Gerelyn|first=Terzo|date=May 25, 2021|title=Uniswap Shines on Top-10 CryptoLeaderboard With Double-Digit Gains|work=Yahoo Finance|url=https://finance.yahoo.com/news/uniswap-shines-top-10-crypto-145756688.html}}</ref> It deployed its V3 to the Ethereum mainnet on May 5th 2021. |
|||
PancakeSwap and SushiSwap are forks of Uniswap and are both [[Binance]] Smart Chain-based. QuickSwap and Umbria Network are both based on Polygon (Ethereum scaling solution) with the former being a fork of Uniswap and the latter being a fork of SushiSwap. IDEX is currently available on Ethereum and Binance Smart Chain and is expanding to Polkadot. |
|||
== Reference == |
|||
<ref>Joseph Baruch Dolgopolsky(2021-01-28).[https://agoranomus.co/dapps-decentralized-apps/ DApps - Decentralized Applications]. Agoranomus. Retrieved 2021-01-28.</ref> |
|||
{{Reflist|30em}} |
|||
{{Cryptocurrencies}} |
|||
[[Category:Digital currency exchanges]] |
|||
Latest revision as of 10:34, 7 May 2022
Redirect to: