Decentralization is a core component of the crypto ecosystem and functionality. However, Cryptocurrencies trading started and continues to exist through centralized exchanges. This is because the infrastructure and liquidity necessary for P2P trading hasn’t yet matured. Nevertheless due to the recent hack attacks on centralized exchanges the need for decentralized trading is once again a matter of great importance. As a result, a number of projects are racing to develop existing and create new decentralized exchanges.
EtherDelta is a decentralized exchange specific to Ethereum based ERC20 tokens. The system uses smart contracts to manage all trades, deposits, withdrawals, and wallet integration. Unlike centralized, exchanges, users don’t need to create an account. If the user doesn’t have an Ethereum account, the system automatically generates one for him/her. This exchange offers significant advantages by offering a wider selection of tokens that are difficult to find anywhere else. And it also allows users to either add new tokens or those just released from ICO. The site, however, does have disadvantages. First, the interface can be intimidating for new traders who are used to the user friendly layout of large centralized exchanges. Second, trades can be slow as all transactions are done on chain on the Ethereum network. Despite this, the site is very secure thanks to its use of smart contracts and by not holding private keys on site.
KNC was the first decentralized exchange. Since it launched in 2017, it quickly gained prominence due to its innovative features and approach towards solving liquidity. The problem with liquidity is that it prevents small centralized exchanges from having sufficient trading volume to fulfill large orders. In response to this, Kyber Network developed a Dynamic Reserve Pool; where “Reserve Contributors” maintain multiple external reserves of assorted coins. This creates a ready reserve pool that can accommodate transactions of all sizes. And when combined with the network’s projected atomic swap and cross-chain capabilities, it makes for one stop crypto trading marketplace. In addition, KNC only requires users to pay for gas fees, making it cheaper to use than its competitors. KNC is working on incorporating a wallet, and its interface is extremely intuitive and easy to use.
Zero X is an open source, public, P2P exchange of Ethereum ERC20 tokens. It’s an improvement over earlier decentralized exchanges in that it utilizes off-chain relays in conjunction with off-chain settlements. The purpose behind this is to speed up the exchange of different tokens significantly and to lower the costs of trading. In essence, instead of incurring a charge per every transaction (order, cancel, trade), fees only apply during a trade. Instead of miners, the system relies on “Relayers”; nodes that forward broadcasted transactions and receive payment for doing so. By using these features, Zero X is a very efficient and effective exchange; one with great potential to advance the use of decentralized exchanges.
Decentralized exchanges offer the advantages of security and privacy but these features make them suspect of AML/KYC compliance violations. In addition, they are over dependent on smart contracts. Unfortunately, smart contracts have flaws in that they lack strong coding. The Dao and Parity multisig hacks are examples of this. Smart contracts become targets for the large monetary value they secure. Also there are a lot of dependencies on the Ethereum blockchain as a single source for smart contracts. Despite these disadvantages, decentralized exchanges are a better way to go moving forward. Centralized exchanges prove to be easy targets for hacking and serve to prolong the control of banks on world economics – the very process Bitcoin is meant to replace.