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Decentralized exchange

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A decentralized exchange (DEX) is a cryptocurrency exchange which operates in a decentralized way, i.e., without a central authority. Decentralized exchanges allow peer-to-peer trading of cryptocurrencies.[1]

Ledger login on Switcheo Exchange

Because users do not need to transfer their assets to the exchange, decentralized exchanges reduce the risk of theft from hacking of exchanges.[2][3] Decentralized exchanges can also prevent price manipulation or faked trading volume through wash trading, and are more anonymous than exchanges which implement know your customer requirements.[4][5]

There are some signs that decentralized exchanges have been suffering from low trading volumes and market liquidity.[1] The 0x project, a protocol for building decentralized exchanges with interchangeable liquidity attempts to solve this issue.[6] Totle is another project trying to remedy the lack of liquidity by pooling together leading decentralized exchanges and routing users' trades according to best price. [7]

Drawbacks

Due to a lack of 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.[8]

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.[9]

In July 2018, decentralized exchange Bancor was reportedly hacked and suffered a loss of $13.5M USD in assets before freezing funds.[10] In a Tweet, Charlie Lee, the creator of Litecoin spoke out and claimed an exchange cannot be decentralized if it can lose or freeze customer funds.[11]

Reference

  1. ^ a b Russolillo, Steven; Jeong, Eun-Young (2018-07-16). "Cryptocurrency Exchanges Are Getting Hacked Because It's Easy". Wall Street Journal. ISSN 0099-9660. Retrieved 2018-09-11.
  2. ^ Sandle, Tim (2018-09-09). "Big investment in cryptocurrency startup Altcoin.io". Digital Journal. Retrieved 2018-09-11.
  3. ^ Castellanos, Sara (2018-03-06). "Alexis Ohanian's VC Firm Invests in Crypto Trading Platform". Wall Street Journal. ISSN 0099-9660. Retrieved 2018-09-11.
  4. ^ "Self Trade Prevention Functionality" (PDF). theice.com. September 2013.
  5. ^ "CZ on Centralization Vs. Decentralization | Binance Blog". Binance. Retrieved 2019-06-02.
  6. ^ "0x lets any app be the Craigslist of cryptocurrency". TechCrunch. Retrieved 2018-11-24.
  7. ^ "DEX aggregation platform totle out of beta with launch of full". CryptoNinjas. Retrieved 2019-03-11.
  8. ^ "Bloomberg - Record Crypto Heist Raises the Appeal of a New Type of Exchange". www.bloomberg.com. Retrieved 2018-11-17.
  9. ^ @Aurora_dao (23 Oct 2018). "#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" (Tweet) – via Twitter.
  10. ^ Osborne, Charlie. "Another hack rocks cryptocurrency trading: Bancor loses $13.5 million". ZDNet. Retrieved 2018-12-13.
  11. ^ "The crypto world's latest hack sees Bancor lose $23.5M". TechCrunch. Retrieved 2018-12-13.
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