Decentralized Exchanges (DEX)
Among cryptocurrency’s most important features is the degree of security used by the blockchain when running transactions. A decentralized network can make sure that all transactions recorded to the ledger are substantially more protected than traditional methods. But we’re still hearing news of hackers running off with millions of dollars’ worth of cryptocurrency. Just how is this possible given the supposed impenetrable security of blockchain? The responsibility for this failure can be blamed on cryptocurrency exchanges.
In fact, it seems out-of-date that despite all of the talk of security when it comes to crypto and blockchain, exchanges continue to prove to be weak point in this matter, namely centralized exchanges. Binance, KuCoin, Changelly, and many more exchanges are very important in the crypto world and they account for a good chunk of overall trade volume.
They are the marketplace of virtually any token, they create market liquidity by matching buyers and sellers, they provide trading platforms for crypto traders to make money, and they are very user-friendly.
But it’s also publicly known that centralized exchanges are the main targets for hackers. Some examples are the $473 million hack of Mt. Gox, the $72 million Bitcoin theft from Bitfinex in August 2016, and the biggest one a $530 million hack on January of Japanese exchange Coincheck. Most of these crypto hacking incidents happened on centralized exchanges.
Centralized Exchanges’ Flaws
Once you place your cryptocurrency or tokens on a centralized exchange, you lose control over it. The exchange has total control over your financial assets even if it is stored in your exchange wallet because the exchange holds your wallet’s private keys, This is unless you withdraw and send the coins to a wallet where you control the private keys.
That’s really alarming to know and to complicate matters even more, the exchange keeps all funds in just a couple of addresses. They are called ‘honey pots’, which become the primary target of hackers.
Many cryptocurrency exchanges are “plagued with poor security and lack investor protections common in more regulated financial markets,” according to a Reuters investigation in 2017. Even though the SEC recently announced that exchanges should require regulated registration behind these security issues, the success rates of hacks do not seem to go down anytime soon.
On the same matter, knowing that centralized exchanges are businesses strictly based on jurisdiction, its lifespan heavily depends on the country’s regulations on cryptocurrencies. Lastly, trading fees of centralized exchanges are expensive and not transparent. These fees are often used to maintain the security of customer funds.
Knowing these issues, crypto enthusiasts, exchanges, and even the authorities are in need of a more secure crypto exchange. Hence, the Decentralized Exchange was developed.
The Solution: Decentralized Exchange (DEX)
A decentralized exchange (DEX) stands in contrast to a centralized exchange. It allows users to retain control of their crypto assets and private keys. A DEX uses utilizes a blockchains protocol to provide peer-to-peer transactions which give users the power to fully control their assets on the platform. In this case, the rate of hacking incidents is significantly reduced compared to centralized exchanges.
Most DEXs are built on the Ethereum blockchain. Transactions between participants and the exchange are securely accomplished using the participant’s private keys via interacting with smart contracts. The process of how DEXs work are as follows:
- Create your own wallet and private keys.
- Use a bridge wallet or an optional hardware wallet to transfer tokens between the DEX and your personal wallet securely.
- Link your wallet address to the DEX thru the bridge wallet.
- Send your coins to the smart contract and begin the transactions.
Note: It is highly recommended to create a bridge wallet separate from the main wallet where you store all your cryptocurrency as an additional layer of security or to prevent fat finger accidents.
A peer-to-peer trading platform for Ethereum-based tokens built on the 0x Protocol. You do not have to send your tokens to a smart contract to trade because the 0x Protocol moves tokens between wallets. Offers increased liquidity by linking other relayers to create networks of liquidity.
EtherDelta is an open-source and decentralized exchange for ETH based tokens. It provides a simple and safe interface to trade ETH based tokens for a very low fee.On Etherdelta you remain in 100% control of your funds all the time. The private keys that you import there are never sent over the internet, and all transaction signing operations are done locally, stored in the cache of your browser.
A fork of Etherdelta. ForkDelta is a decentralized trading platform that lets you trade Ether and Ethereum-based tokens directly with other users.
A decentralized Ethereum and ECR-20 exchange incubated by Bitmain, one of the most famous mining companies in the space. DEx.top provides a dual-ledger system that guarantees that transactions are almost instant while still keeping transfer of funds completely decentralized.
An improved version of the Open Ledger exchange. It offers a fully decentralized trading system in which all transactions are processed by the Bitshares (BTS) Blockchain which can process up to 100,000 transactions per second (TPS).
Focuses on simplicity and convenience, featuring an intuitive and familiar interface that most users will have no trouble navigating. Available for Windows, Mac OS, Linux, and web, the Waves Client is both a wallet and a decentralized exchange with other advantages like secure token issuance and leasing.
Formerly known as Bitsquare, is the first decentralized exchange ever and has been around since 2014. Being the only of its kind so far, Bisq allows users to trade cryptocurrencies with fiat pairs like EUR, USD without the use of any proxy tokens or centralized/third party gateways. This feat is achieved through an ingenious system of multi-signature escrows and decentralized moderators.
A decentralized Ethereum exchange features Ether and ERC-20 token trading. IDEX boasts some advanced features like limit and market orders, gas-free cancels, and the ability to fill many trade orders at once. IDEX has a 0.2% taker fee and a 0.1% maker fee, and a standard gas-fee is also deducted.
Advantages of DEX
- Security – gives users full control of their assets, possibility of getting hacked is significantly reduced compared to a centralized exchange where holdings are being controlled by a single third party. The peer-to-peer system also prevents market manipulation and tampering with customer funds.
- Privacy/Anonymity – Registration with the exchange or providing personal information is no longer needed. Lack of KYC/AML process helps with information privacy.
- Regulation – DEX can operate safely without the threat of jurisdiction policies interfering with operation.
- Cost – DEXs don’t need to spend on managing user funds.
- Hardware wallet integration– Participants can directly send their tokens from their hardware wallets to the DEX’s smart contract. This prevents users from potentially exposing them to phishing and keylogging.
Given these benefits, DEXs have become the safest way to trade crypto, without worrying about the non-stop cyber attacks being attempted on centralized exchanges. However, at this point, DEX is still far from being perfect, DEX still faces many challenges like with liquidity and speed of transactions. On the other hand, potential solutions are continuously and regularly being proposed. The future of DEX’s looks bright and several centralized exchanges like Binance are looking to move over to a DEX style system.