The decentralized exchange (DEX) has been eagerly expected by market commentators to make considerable progress in 2019, but this has not been achieved in practice. DEX is still a small company compared with centralized peers because they have not yet formed advantages in mobility, accessibility, leverage and smooth user experience.
Although the purpose and goal of DEX are commendable, it is still in the early stage of cryptocurrency ecosystem evolution. Although some users may prefer DEX for rational reasons, the vast majority of cryptocurrency traders still use centralized exchanges. There is no doubt that DEX has good long-term prospects, but so far, they have not realized the value of its publicity.
Cryptobridge, a decentralized exchange that has ceased to operate, is a good example. The exchange seems to be increasingly deviating from the principle of decentralization. A few months after introducing KYC requirements, the exchange was completely closed.
Uniswap is one of the most popular DEX protocols. It is an exception to DEX performance. It has achieved remarkable success since it was launched at the beginning of this year. But this technology still has room for maturity. Although there are more than 250 dexs and more than 30 DEX protocols, in terms of quantity, no one can replace the centralized exchange in the near future.
Why DEX? Frequent hacker attacks and problematic Dex in a few centralized exchanges have led some traders to demand more decentralized and safer alternatives.
DEX is set to be a non KYC exchange and does not even require an e-mail address because the identity used is from a public key pair. Theoretically, this means that DEX is unsupervised and can protect users’ privacy.
When trading in dex, it is almost impossible to break into the transaction and steal funds, because there is no centralized server or component to target. In this sense, you deal directly with sellers or buyers, eliminate intermediaries and their fees, and always maintain custody of your assets.
DEX is only nominally “decentralization”
As we outlined above, DEX claims to be able to solve various problems consistent with the spirit of cryptocurrency. However, in most cases, the term “decentralization” is misleading. DEX has various forms, from no guardianship (IDEX) to licensing (such as binance DEX), but none of them can be called true decentralization.
Usually, centralized and decentralized elements are combined, such as Ethereum’s 0x protocol and IDEX. They use on chain settlement, but they combine off chain orders.
DEX uses this hybrid model to avoid the low speed associated with on chain protocols.
“Decentralization” also does not solve the manipulation of the cryptocurrency market. According to an academic research paper published in April 2019, arbitrage robot utilizes DEX users with network delay and low cost. In many markets, preemptive trading is a problem, but because orders, bids, asking prices and even transaction cancellations are published on public blockchains that can be seen by anyone, this situation is magnified on DEX. Now there are some solutions, but there is no breakthrough.
We generally believe that DEX is regulatory resistant. Although the agreement cannot violate the law, we can associate the agreement with a group of individuals (i.e. key developers). If the food law involves fraudulent activities, the authorities can still identify and arrest persons related to the food law. This is exactly what happened to etherdelta in 2018. A real DEX requires multiple implementation development teams to work at the same time to avoid the fate of etherdelta.
On this basis, DEX failed to fulfill its commitment to decentralization. To flourish and become the preferred place for bitcoin dealers, there are still some major obstacles to overcome.
Obstacles faced by Dex
Traders are mainly concerned about liquidity. If they cannot complete the transaction, they will go to a matching platform to complete the order. Leverage and user experience are also important considerations.
Liquidity depends on how easy it is for you to enter and exit a transaction, transaction costs, and how many people trade on the trading floor. Traders are most worried about liquidity.
For Ethereum DEX, the daily trading volume in the past two years has been far lower than 300000 eth, with only a few weak peaks occasionally. Since mid-2018, the number of traders on ether based DEX has also decreased significantly, falling to 1799 on December 8.
Comparing the number of DEX traders with that of centralized exchanges, this is only a drop in the ocean. Even compared with non KYC centralized exchanges, this figure is still very low.
Bitmex’s permanent swap is the most popular bitcoin derivative contract, with an average of about $2 billion per day, slightly higher than 13.3 million eth. Although DEX guarantees that you can control your funds, it doesn’t matter if traders can only trade small amounts of funds.
Leverage is an important factor for all traders, so DEX is at a disadvantage in this regard because their exchanges have no leverage. Leverage is a key feature of the traditional market, and the development of bitcoin derivatives has successfully replicated this feature in the cryptocurrency market.
Traders want to trade what they can make money. In some countries, the investment opportunities available to individuals are limited, and they may not be able to trade the assets they are allowed to trade because the price is too high.
Since cryptocurrency belongs to the gray area of legislation, trading bitcoin represents a great opportunity. In addition to leverage, cryptocurrency transactions are often risky. It also brings huge potential returns.
Unlike DEX, the most successful exchanges provide leverage. Some DEX have begun to provide leverage (such as dydx), but its leverage ratio is relatively low. However, low liquidity and the complexity of using decentralized leverage products mean that DEX will be far less popular than the leverage tools provided by centralized exchanges in the foreseeable future.
As cryptocurrency enthusiasts may know, it can be cumbersome and complex for novices. There is much room for improvement in the user experience of cryptocurrency, and DEX is no exception.
Most traders want to trade quickly and efficiently. They don’t care much about the technology supporting trading, so they can do so 24 hours a day. DEX not only provides sovereignty, but also undertakes the responsibility of providing its own security. Therefore, they inherit the element of poor user experience in cryptocurrency, which is a major factor in their low utilization.
Compared with trading on traditional exchanges, trading on DEX has fewer options, which will eventually be a very different experience. There are no advanced trading orders, such as stop loss, tracking stop loss, etc. In addition, if users encounter problems, there is no special customer support service to help them solve the problems.
Cryptocurrency traders say they are willing to pay a premium for a product that is more convenient for them, such as bitcoin perpetual swap. Its transaction cost is slightly higher than that of futures contracts, but the transaction volume is much larger because it is more convenient.
DEX is still in its early stages
DEX is still an emerging concept, so their technology still needs to be developed. Although their goal is to serve a specific purpose, they are not attractive to most cryptocurrency traders because they cannot meet most of their needs. For philosophical or political reasons, DEX may be more suitable for some traders, but it still represents only a small number of cryptocurrency users.
So far, centralized exchanges have done better in providing what investors and traders really want. Trading on a centralized exchange will not put your security at risk because you can use the cryptocurrency exchange rating resource cer Live to ensure good safety measures.
In the long run, DEX is likely to become more advantageous, but for now, they just lack some features that make centralized exchanges popular, such as liquidity, the use of a range of cryptocurrency tools, leverage and smooth user experience.
Responsible editor; zl