DECENTRALIZED EXCHANGE (DEX)
Challenges & Opportunities
There are more than 6198 cryptocurrencies (listed on CoinGecko) existing in the exchange ecosystem and every cryptocurrency is designed for different challenges to be solved. Bitcoin (the most expensive crypto globally as of October 2019 by Statista), being the first implementation, works purely as a store of assets. Ethereum works totally as a turing machine to write applications, Zcash has privacy as the pivotal role, and Cosmos has interoperable blockchain. Trading cryptocurrencies has always been a challenge and yet remains a hot topic and the highest total volume of buys or sells in the last 7 days as on 28th November 2019 is $10,761,867,974 on BKEX.
By the end of November 2019, the value of cryptos has hyped globally to reach 203.35 billion USD. In order to proceed with a crypto trade, there are two types of exchanges centralized (CEX) and decentralized exchanges (DEX). Despite having liquidity and speed benefits, centralized exchanges are a bigger instrument of market manipulation. DEX is a ray of hope to solve market manipulation and custodial challenges. The chart below indicates the number of CEX (centralized) and DEX (decentralized) exchanges based on a study by TokenInsight:
While the total number of crypto exchanges globally is 400+, only 19% are decentralized as stated in a research study conducted by Token Insight. This huge number gap exists mostly because of regulations and ease of use. The number of DEXs are increasing gradually but will take time to be widely accepted.
Let’s explore what are the challenges and opportunities for Decentralized Exchanges (DEXs).
What is a Decentralized Exchange?
Decentralized Exchange (DEX) is a crypto exchange platform built on top of specific blockchain to ensure decentralization. These exchanges allow users to directly find each other and trade on chain to minimize the custody risk associated with centralized exchanges. To trade on a DEX, users do not need to transfer their cryptos to the exchange wallet.
DEXs are a solution for centralization as they ensure:
- Decentralization: No central authority.
- Lower hacking risk.
- Lesser trading fees.
- No broker, no third party.
Before moving towards DEXs opportunities and challenges, here is a short comparison between DEXs and CEXs:
DEXs have no central points of failure and are uncensorable. DEXs provide full control over private keys by user himself/herself and how funds are used, secured, and transparent trading.Such exchanges cannot be pressured by regulators and governments to shut down or censor specific trades. Other pros include:
- Lower fees
- Less operation cost
- Lesser down time
Mostly, order matching on DEX is done via smart contracts while other things related to the process are done via on-chain settlement. Maker and Trader submits their order in the smart contract-one point failure may occur. The trade process is simple: Deposit, trade, and withdraw. DEXs allow exchanges of small and large transactions.
Decentralized Exchange Challenges
While decentralized exchanges (Dex) seem to solve the most commonly faced problems in centralized exchanges, they have their own loopholes. Present DEXs still have no way to stabilize prices which means they may charge users more than the real price of a coin. Ethereum is the most commonly used platform for DEXs and these DEXs have failed due to the architectural issues. Decentralized exchanges does not have advanced trading functionalities such as margin trading and different order types (stop losses or limit orders).
Some other major challenges faced by DEXs are divided into two:
- DEXs create on-chain order books with tons of data of transactions which depletes all the network resources and affects throughput significantly.
- Order matching waiting time increases due to transaction load.
- The end users are under the same counterparty risk that existed in centralized exchanges.
- On-chain trading is not real-time as all transactions have to be processed by miners.
- DEXs don’t support a wide range of cryptocurrencies and lack interoperability between blockchain networks and other exchanges which limits trading pairs to a specific network issued token.
- DEXs require thousands of different computers to sync with each other leading to a longer block confirmation time and slower transaction speed.
- Trade collisions result in higher transaction fees.
- Low throughput caused by the slow order matching has led people to gravitate towards the centralized exchanges.
- Due to less influx of users, DEXs suffer from low liquidity problem.
- No fiat currency trading: Fiat currencies require a trusted central party to record account balances.
- Front-running and price-time priority issues.
- DEX platforms are not intuitive or easy to use and require a high level of technical know-how.
Due to these issues faced by Decentralized Exchanges, users tend to lean towards Centralized exchanges. Following chart expresses the trading volume of DEX to be at the lowest i.e. 0.8% (statistics by TokenInsight).
How to improve DEXs
To increase DEX acceptability among crypto users, DEX challenges mentioned above should be solved. We consider high throughput of DEX’s, Interoperable assets DEX’s, Highly liquid or aggregator order book are most common improvements required.
Interoperability of blockchains is a core concern for blockchain ecosystem. In order to ensure blockchain-to-blockchain communication, cross-chain atomic swaps are implemented. It is a mean of trading cryptocurrencies which exist on separate blockchains, like Bitcoin and Ethereum. Atomic swaps have shortcomings of high throughput and slow DEXs which eventually disappoint users. ANTLIA Project (powered by RNS Solutions, leveraging Codebase of Cosmos Blockchain and IBC) aims to solve such challenges. Antlia project presents scalable and interoperable blockchain ‘Antlia Protocol’ with Antlia Inter Blockchain-Communication Layer, SDK for DEXs and Antlia aggregator based High Throughput DEX trading engine.
RNS Solutions is building a community of developers along-with RNS Solutions’ 20 experienced core developers who are fully engaged in the development of Antlia Project. RNS Solutions has invested seed funds for the project and is organizing Pakistan Blockchain Olympiad and Ethiopia Blockchain Olympiad where around 8+ teams will participate to solve challenges regarding Antlia Project. Finally, the top teams will participate in International Blockchain Olympiad (HongKong). We are looking forward from the blockchain community to participate in our efforts to improve DEXs challenges and make trading more transparent.
- Website: www.rnssol.com
- Email: email@example.com
- Facebook: https://www.facebook.com/rnssol/
- LinkedIn: https://www.linkedin.com/company/rnssol/
- Youtube: https://www.youtube.com/RNSSolutions
- Github: https://github.com/RNSSolution