In centralized cryptocurrency exchanges, orders and trades are recorded off-chain on a private database. While this solution is used in the mainstream financial world, it creates, in the cryptocurrency market, counterparty and operational risks such as hacks and thefts (i.e. Mt. Gox and Bitfinex scandals).
Also, centralized exchanges are more vulnerable to government censorship. Exchanges can easily have their operating licenses revoked and their funds seized. There have been several instances in the past, such as in India and China, where governments have banned and forced exchanges to shut down.
Having control of user’s assets also means that they can impose their own terms on block users assets or accounts without notice. Not to mention manipulating trading orders and wash trading exercised by centralized crypto exchanges to create the “impression” that a particular trading pair is attractive and cause a massive pump and dump scenario.
These increasing concerns make decentralized cryptocurrency exchanges a safer and attractive option. Since orders in a DEX are matched and executed directly peer to peer, it makes the whole process more secure, transparent and easy to identify fake trading volume. Additionally, users of DEXs may benefit from lower withdrawal fees.
However, despite benefits like security and full control over assets, DEXs have failed to gain mass adoption. Some of the key reasons are :
Liquidity Concerns
One of the leading reasons contributing to this low liquidity problem is the fact that today most DEXs don’t support a wide range of cryptocurrencies and lack of interpretability between blockchain network limits trading pairs to specific network issued token.
Today, in a few DEX platforms there is the possibility to trade other network tokens. These are known as proxy tokens meaning you have escrowed your tokens for storing to a custodian, meaning end-users are under the same counterparty risk that exists in centralized exchanges.
Furthermore, the process of trading with proxy tokens requires the use of gateways to convert external native coins (such as Bitcoin) to and from the affiliated proxy tokens adding complexity for end-users.
Difficult to use:
Current DEX platforms are not intuitive or easy to use and require a high level of technical know-how. Most new cryptocurrency traders will opt for the easy option, i.e. centralized exchanges.
Slow performance:
Another important disadvantage of DEXs is that they process transactions relatively slower than centralized exchanges. DEXs require thousands of different computers to sync with each other and leading to longer block confirmations and slower transaction speeds.
A quick comparison table of centralized Vs Decentralized exchange
Note in decentralized cryptocurrency exchanges, transactions speed depends on underlying protocol, usually in one of two ways:
In Option One, the DEX maintains an on-chain order book where the trading of tokens is facilitated by smart contracts (transaction speed depends on network congestion which can be slow). As a result, any transaction (action like placing an order, canceling) may cost users a network fee. This is why most DEXs today are based on a hybrid approach, Option Two.
A quick comparison table of DEX (Use Option One for a complete decentralized solution and highest security) — Data as of 24th Mar 2019 10:00 AM CET. Note- Next generation DEX today use Atomic swap. More explained in the later section.
In Option Two, the DEX maintains an off-chain order book and then facilitates transactions online for final settlement. In such an arrangement, you never have to leave your tokens sitting on an exchange, it’s faster, and provides a near centralized exchange experience.
Basically, you run an order book off-chain, have the “exchange” match orders, and then send them to settle through a smart contract. This means traders still rely on a trusted third party to maintain the correct order book or price-time priority, but that’s a much smaller risk relative to the custodial risk of transferring crypto into a centralized exchange’s wallet.
A quick comparison table of existing DEX (Option Two for near centralized exchange experience) — Data as of 24th Mar 2019 10:00 AM CET
A decentralized exchange alternative that seeks to successfully remove the threats and limitations of centralized cryptocurrency exchanges must feature the same speed, liquidity, and convenience of a centralized exchange. As of today, no decentralized exchange has successfully replaced any of their centralized counterparts.
A Next Generation DEX For Complete Solution
Today, the highest volumes in any centralized exchange are for crypto assets which are paired with BTC as a base price, however, adding a BTC pair in a DEX is a challenge due to long transaction confirmation times which could be up to 10 mins, along with cross-chain interpretability.
This issue is solved with atomic swap technology. Atomic swap is a cryptographically powered smart contract technology that enables two parties to exchange different cryptocurrencies/tokens without depending on a third party or an escrow manager plus there is no default risk on either side.
It is a more secure and user-friendly option than DEXs who use proxy tokens to add tokens from other networks or blockchain projects.
By adding atomic swap, exchanges can provide more trading pairs to ensure better liquidity. Exchanges who are working on integrating atomic swap in their exchanges are Komodo, ResDex, Atomic Wallet, Swap.Online etc.
Resistance (ResDEX) has an edge over its counterparts in terms of transaction speed, advanced privacy features, and a partnership with Huobi to ensure better liquidity on the platform.
- Resistance InstantSwap allows users to perform trades on ResDEX in under a minute. ResDEX removes the need for the trader to wait on these block confirmations and instead lets each party in the trade make the swap immediately.
- Liquidity: For wide availability of crypto asset options, ResDex implements atomic swap which allows the user to trade up to 95% of existing cryptocurrencies directly with one another. In addition, the Resistance partnership with Huobi will allow liquidity of more than 300 cryptocurrencies on the ResDEX exchange.
- Fiat gateway: Another barrier to entry for DEXs is their lack of support for fiat to crypto offerings. With ResDex users can buy crypto asses with credit/debit cards.
- ResDEX provides the end-users advanced privacy options (uses Zero-knowledge proof, zk-SNARK, and TOR) during the order-matching process allowing the investor to trade in private.