In light of the news that the LocalBitcoins P2P crypto exchange plans to introduce the KYC (Know Your Customer) standards, more and more players of the crypto market are considering alternative trading opportunities. One of the most popular options is decentralized exchanges (DEX), which do not require user verification while providing a higher level of security for traders.
Problems of Centralized Platforms
In January of this year, more than $732 million in NEM and XRP tokens was stolen by hackers from the wallets of users of the Japanese Coincheck Bitcoin exchange. A bug in the Coinbase exchange, noticed by users of Reddit in early February, allowed attackers to repeatedly write off funds from accounts of users who have made just one purchase. Cases of manipulation of asset prices have also been repeatedly noted on large centralized platforms.
In turn, the key advantages of DEX platforms are anonymity, lower commissions, as well as the absence of intermediaries, such as centralized exchanges (CEX) like Binance, Kraken, EXMO, Bitfinex, and Poloniex, which increases the level of security and control over assets to the parties involved.
In light of these events, experts note the growth in trading volumes of various DEX platforms. For example, in January of this year, the daily volume of the exchange 0x for the first time exceeded $1 million. The volume of exchange transactions on the Switcheo platform operating on the basis of the NEO blockchain amounted to more than $2 million. A growing number of users was reported by the DEX team of the Bisq exchange on their Twitter account:
CEX vs. DEX
The key role of centralized platforms is to mediate between traders who want to make a deal. Exchanges charge an average commission of 0.1% to 3% of the transaction amount for the provision of CEX services. The following levels exist on centralized exchanges:
Matching mechanism (algorithm of comparison of orders for purchases and sales)
As a result, the exchange controls the entire system, infrastructure, as well as user accounts and assets stored on them.
In contrast, DEX exchanges allow users to make transactions without intermediaries. This is possible because the DEX exchanges are built on blockahin, which means that each transaction is recorded in a public distributed ledger, a copy of which is kept by all network members.
Transactions between traders on DEX exchanges are carried out by verification through multi-signatures, which allows users to remain anonymous and not to think about the problems associated with the passage of the verification process. Each exchange user has a wallet with a private key, and each trader is personally responsible for the safety of their funds since the exchange does not have access to them in any case. Moreover, some DEX platforms allow one to trade with a personal cold wallet.
A higher level of DEX security is guaranteed by the fact that the platform does not have access to accounts and user assets. This makes such platforms not the most attractive target for scammers and hackers, since if the platform does not control assets, and its blockchain network is almost impossible to forge or crack, why bother spending money and effort?
Also, the blockchain network of exchanges is located on several servers, which guarantees their continuous operation. As for commissions, on most DEX platforms they are either completely omitted or significantly lower than on centralized exchanges.
As Vitalik Buterin noted on his Twitter:
Nevertheless, DEX platforms have several drawbacks related to limited capabilities. For example, the lack of opportunities available on CEX exchanges, such as the issuance of orders of stop loss and take profit, trading with leverage, integration of mail services, and two-factor authentication via SMS. And to fully conduct and finalize the transaction, both parties must be online. Moreover, users of many DEX exchanges face problems in the form of poor user interfaces and lack of technical support.
Overview of DEX Exchanges
Despite the described drawbacks that traders face on decentralized exchange platforms, many crypto market players are sure that the solution to these problems will be found in a matter of time. With the development of DEX platforms and the growing number of their users, developers will introduce updates aimed at eliminating these problems. We reviewed the DEX exchanges operating on the current crypto market, and made a brief overview of the most promising platforms.
IDEX is one of the most popular DEX platforms, which allows one to make transactions with tokens of the ERC20 standard. IDEX works through smart contracts that manage transactions, as well as through the trading engine and transaction processing arbitration system, where authorized transactions are recorded.
To start working on the exchange, each user must have their own ETH wallet. From that wallet, account users will have to deposit funds into the smart exchange contract, which will allow them to start trading. One of the key advantages of the exchange is the possibility of canceling an order without paying commissions. IDEX will charge a commission of 0.1% for market makers and 0.2% for participants. The exchange also includes integration with hardware wallets, such as Ledger Nano S and MetaMask, whose owners can directly make transactions using the funds in their wallets.
To date, the exchange has 228 cryptocurrencies, and its daily trade turnover is more than $10 million.
EtherDelta is a cryptocurrency DEX exchange that specializes in tokens of the ERC20 standard of the Ethereum network. The key advantage of the exchange is the fact that it can make transactions with tokens issued during the ICO, which have not yet been added to the listings of other exchanges. In this connection, many platform users use it to convert new tokens into Ether.
The trading orders commission for EtherDelta is 0.3% of the transaction amount, and platform users pay small commission fees to the miners in the cases of input and output of funds, as they are engaged in confirming transactions in the Ethereum blockchain.
EtherDelta presents 135 cryptocurrencies and ERC-20 tokens, and its daily transaction volume is $1.6 million.
The decentralized OpenLedger exchange operates on the basis of the BitShares blockchain and is part of an ecosystem that includes HubDSP advertising technologies, OBITS tokens, and ICO crowdfunding system. In this connection, registered users of BitShares automatically have an account on OpenLedger. This exchange is not among the most popular, but the project has already secured the support of giants such as IBM, Intel, Wells Fargo, and JP Morgan. The exchange gives the opportunity to trade in cryptocurrencies, smart coins (assets that are backed by real values), assets, shares and fiat money.
The exchange has 102 cryptocurrencies, and its daily turnover is currently $585,000.
The decentralized Waves Exchange was launched in March 2017, becoming the flagship product of the project. On the Waves DEX, all transactions are performed on the blockchain. The match manager keeps a list of orders, while users can trade any pair of tokens directly without having to conduct a transaction through the intermediate currency. In addition, the latest updates allowed increasing the network bandwidth up to hundreds of operations per second.
For conducting transactions, traders pay fixed commissions in the amount of 0.003 WAVES for one order, independent of the volume of the transaction. In this case, if the order is not fully executed, then the trader must pay the entire part of the commission, which is calculated proportionally. The commission is not charged on closed orders.
To date, the Waves DEX presents 64 tokens, and the daily trading volume is $550,000.
Bisq (formerly Bitsquare) is a decentralized exchange of cryptocurrencies that connects sellers and buyers through a single blockchain network. To conclude a transaction, platform users can independently place an order or choose one of the existing ones. All transactions are carried out using special wallets with a multi-signature. Each transaction is recorded on the blockchain, for which traders are charged a commission, which goes to the network's managers for confirmation of the transaction. In the latest platform update, however, developers reduced the minimum commission fees by 75%, introduced seven new payment methods, and also provided traders with the option to deactivate open orders.
One of the key features of Bisq is the ability to perform operations with fiat without any integration with banks or national currency systems. This is possible thanks to the Bisq trading protocol, which carries out off-platform payments, for example, through normal P2P payments by SEPA in Europe or Zelle in the US.
The exchange has 14 cryptocurrencies, and its daily trading volume is $165,000.
BarterDEX is a decentralized exchange for cryptocurrencies developed within the framework of the Komodo public blockchain. Transactions on the exchange are made by using the technology of atomic swap, which eliminates the need for third-party participation and reduces the risks for counterparties.
According to the white paper of the latest version of BarterDEX, the exchange supports SPV wallets based on Electrum in addition to dozens of "ordinary wallets." Also, the current version of BarterDEX has the function of "Liquidity Multiplication," which allows one to use the same means for queries in several exchange directions, where the first executed order completes the transaction.
Currently, just 15 cryptocurrencies are represented on the exchange, but BarterDEX supports trade with any coin if the developers connect it to the exchange through a special protocol.
Hodl Hodl is a peer to peer DEX crypto exchange, which allows traders to trade directly with each other. Instead of storing users' funds, the exchange locks them in escrow, which minimizes the risk of theft and shortens trading time. Every time a contract is created on the platform, the exchange generates a cryptocurrency escrow address with a multi-signature. The seller sends the cryptocurrency from his wallet to this address, and as long as the funds are blocked in the escrow, the buyer sends the payment to the seller.
Since Hodl Hodl does not keep funds, the exchange is not subject to requirements for compliance with complex procedures. As a result, all transactions occur directly between users' wallets. Also, until July 2018, Hodl Hodl will not charge an exchange commission from traders.