How To Better Protect Your Crypto Using Decentralized Exchange
The concept behind cryptocurrencies and blockchain technology is to do away with dependence on central authorities. While this is true, central exchanges (CEX) such as Coinbase are important for the exchange of cryptocurrency, and still create an element of control, more like traditional banks, hence contradicting the premise of doing away with central authorities. Click Here To Go Straight To Our Online Tutorial
Over the years, leaders in the cryptocurrency industry have been victims of hacker attempts, with successful hacks costing companies like Poloniex, Bitfinex and Bitstamp cryptocurrency to the tune of billions of dollars. In some of these platforms, users have to be patient, and at times wait for months before their accounts are verified and cleared for trading.
That being said, there are risks and issues that are inherent in central exchanges. The exchanges generally offer a subpar product. This comes amidst other challenges like regional regulations that threaten to shut down the exchanges, the threat of security hacks, exorbitant fees and a host of factors. For those who invest and carry out their transactions in cryptocurrency, decentralized exchanges (DEX) are the best answer to most of the challenges they face with centralized exchanges.
The Difference Between a DEX and a CEX
There are several decentralized exchanges available in the world at the moment. The simplest definition or explanation of a decentralized exchange is a platform where customers can conduct peer-to-peer (P2P) crypto transactions between their wallets. Compared to a centralized exchange, you do not send your funds to the centralized exchange. Instead, a smart contract holds them (this works as an escrow service), and they carry out the transaction. Smart contracts are primarily used on the Ethereum blockchain.
One of the benefits of trading in a decentralized exchange is that it eliminates the role of a third party. There are several benefits to this. Obvious ones include the fact that transactions are cheaper, you do not have limits on withdrawals or sanctions on trading limits, you do not need to waste time with the Know Your Customer (KYC) process, and the risk of a hacked exchange is low, implying a lower risk of losing your tokens.
On the other hand, centralized exchange platforms such as Coinbase leave the security of your information and funds in the hands of a single entity. The same entity is tasked with executing your trades. This poses several challenges. Because it operates under the same pretext as an IOU, the only time you are in control of your funds is when withdrawing them to your private wallet.
In a decentralized exchange, you never relinquish control over your private keys or your coins by extension. A centralized exchange will not give you personal private keys. By trading here, you depend on the centralized exchange employees to protect and manage your funds diligently.
Taking the case of Mt. Gox, for example, misappropriation of funds, together with successful hacking attempts, were responsible for the loss of $450 million. The CEO was sent to jail, and many people lost their hard-earned money.
Another challenge with centralized exchange platforms is that it is very easy to lose access to your account, because of single access and failure points. Getting a resolution in such a case might also take longer. decentralized exchanges on the other hand, do not have a single point of failure. Therefore, even in the event of a maintenance upgrade, or a natural disaster, everything will still run smoothly.
It is no surprise, therefore, those decentralized exchanges perform better than centralized exchanges. With that in mind, the following are some of the leaders in the industry at the moment:
Based in Brooklyn, this startup decentralized exchange is a P2P platform where transactions are conducted privately off chain between two entities. It runs on the Ethereum blockchain, so irrespective of their location, two entities can settle their transactions easily.
What makes this decentralized exchange unique is the fact that they do away with the need for an order book. In its place, they use an intent to trade system. Order books display buy and sell orders to all users. This leaves the market open to manipulation through front-running. By getting rid of this hurdle, the trading process becomes fair, especially for market makers.
Since this decentralized exchange runs on the Ethereum blockchain, the ERC20 tokens are traded by takers and makers. ERC20 tokens use the same transfer protocols, making them most suitable for P2P transactions.
Makers display the tokens they want to exchange on the indexer, while the taker simply fills their order. An oracle aggregates prices by using APIs, allowing the maker and the taker to bargain an acceptable price.
To announce any trade on the indexer, the maker must be in possession of AirSwap tokens (AST), which represent the value of the tokens. There are no fees involved in using AST tokens.
Kyber Network works in the same way that AirSwap does. They eliminated the need to order books, and also operate under the Ethereum protocol. Perhaps one of the main differences between Kyber Network and AirSwap is that they leverage several reserves, thereby offering traders immediate liquidity. Other than that, users are made aware of the conversion rate instead of negotiating privately P2P, before they can decide to go on with the transaction or not.
Kyber Network uses payment APIs. Through this, merchants can accept the ERC20 tokens, and convert them into whichever cryptocurrency they prefer. For example, assuming a merchant sells a laptop, but they want their currency in ETH. The customer, on the other hand, uses TRX (Tronix). The customer will make their payment in TRX, but the merchant will receive ETH.
Other than the gas cost, there are no fees on this exchange. Therefore, market makers on the Kyber Network can get good profits from a spread. Reserve managers oversee any third-party reserves. Hence they can determine their prices for the token pairs that they use.
Because of a Kyber Contract, transactions are conducted using the best rate available from all the reserves. There are on-chain and off-chain protocols in play, to sniff out any frivolous activity, in a bid to prevent users from conducting unfair transactions. This is particularly aimed at keeping reserve managers in check, so they do not implement falsified rates.
A reserve contributor must buy the Kyber Network Crystal (KNC) to profit from the spreads on the platform. The Kyber Network platform deducts some KNC off each transaction by the contributor reserves. Once the operational expenses are covered, the rest of the KNC will be burned, hence increasing the KNC value.
There are plans to introduce more financial tools into the system in the future, including forwards and options. Cross-chain trading is also a prospect for the future, which will allow users to trade in cryptocurrency from two different blockchains without using a third party. This way, users will be able to exchange, for example, ether for bitcoin.
0x has been around since 2016, and it runs on an open-source protocol that does not require permission. This is the same architecture under which smart contracts used in decentralized exchanges are developed. Through this system, anybody can run a decentralized exchange. This is a feature that the founders hope will be key to interoperability and mass tokenization between decentralized exchanges in the future.
To match takers and makers, 0x works off-chain, just like AirSwap, before coming back on the chain to settle the ERC20 transactions. However, instead of using an indexer, 0x uses order books. Based on this analysis, 0x is designed for conducting efficient, faster and smaller transactions, while AirSwap, on the other hand, is geared towards market makers.
Through 0x, anyone who wants to can be a relayer – especially developers. A relayer is a person who will host order books privately or publicly, off the chain, to match the takers and makers. This is what is referred to as broadcasting orders. Relayers receive fees for their services in ZRX, the currency used in 0x. If you hold ZRX, you can also cast your vote on how 0x is governed, which gives the token more value.
Makers can generate and process P2P orders basically through whichever medium of communication that is available to them, including Facebook Messenger and emails to the takers. Once the taker receives the order, they have to decide whether they will fill the order or not. Since the only designated address that can take the order is the taker’s, this is a secure process.
P2P interaction allows the takers and makers to avoid relayer fees that are common in broadcast orders. At the time of this post, 0x have introduced 0x OTC. This is a decentralized exchange where users can trade in ERC20 tokens without using a relayer.
A lot of users have come to appreciate Waves because this decentralized exchange makes it possible for users to deposit and withdraw fiat currencies like the Euro and US Dollar, besides the prospect of trading in cryptocurrencies. It is common knowledge that there are very few exchanges that offer fiat exchange services, like Gemini and Coinbase. For this reason, the fees charged by these centralized exchanges are very high. Comparatively, however, Waves offer the services at a low, fixed cost of 0.003 WAVES for each transaction, size notwithstanding.
Users are protected from front-running in Waves through concealed orders, just like in AirSwap. This decentralized exchange uses matcher nodes to pair orders off the chain in a central server before these are executed on the blockchain. This makes sure the platform is fair and secure.
For people who want to earn something on the side, you can make some passive income by mining on Wave. The Proof of Stake Algorithm that this decentralized exchange run reflects the user’s mining power based on the WAVES they own. The more WAVES you own, the higher the likelihood that you will process the next block, in the process earning transaction fees.
To be eligible for this feature, you need to have at least 1000 WAVES. This is, however, not the only way to earn passive income. Another option would be to make use of the Leased Proof of Stake protocol. Through this, you can lease whichever number of WAVES you have to a node.
You can also create custom tokens and trade them in the decentralized exchange with other tokens. According to the information on their website, you do not need any technical skills to create custom tokens, which can be made in under a minute.
Others worth consideration include:
- Future OmiseGo decentralized exchange
- Future Binance decentralized exchange
You have to know about the trade-offs between participating in a decentralized exchange. There are a lot of liquidity issues that are solved by the concept of openness. However, the risk of front-running is increasingly higher. This usually especially on Ethereum when the users pay attention to orders moving in the market and follow through by setting their transaction gas prices higher than the transactions they are monitoring.
According to the 0x CTO, Amir Bandeali, this concern is not limited to decentralized exchangealone. This problem is not unique to trading alone. Front-running is one of the biggest issues that blockchain technology is struggling with in general. Immediately someone submits a transaction; it becomes public knowledge, so people monitor it.
However, because decentralized exchangeis among the first success stories behind blockchain technology, they are getting a bad reputation because of front-running.
To deal with this, 0x is considering advanced features like an embeddable trade widget or a trade execution coordinator. These will allow applications and wallets to rebroadcast orders from the relayers, hence monetizing automatically.
To make front-running undesirable, Kyber, an open source platform, limits the value of transactions per trade. It’s currently capped at $3,800 or SGD 5000 for users who have not been KYC’d and SGD 10000 for users who have KYC’d.
Ron Bernstein, a veteran at trading platforms, founded Paradex, where they effectively combined a closed order book model and the 0x protocol. In this platform, trades are settled on the Ethereum blockchain, though there is a closet matching model which still runs some of the features that expert traders need like price/time priority and best price guarantees.
There are trade-offs, of course, associated with the matching model. The relayer has little access to smart contracts. One of the good things about using an open order book is that you can conduct all your transactions automatically. Using the matching model, it would be impossible to benefit from this.
According to Bernstein, it is this matching concept that makes it difficult for Paradex to consider beneficial shared liquidity like 0x. He, however, admits that their trade-offs are not comparable.
When we look at the user experience in the decentralized exchange, there is still a lot of work to be done to get to the level that centralized exchanges are. The ability to accept fiat currency is one of the main advantages that centralized exchange have over decentralized exchange. It also follows that the customer service is better and the high liquidity that centralized exchange have are impressive.
On the other hand, however, the ease of account verification, deposit and withdrawal, the anonymity of account holders, borderless structure, low transaction fees, impressive security and 24/7 uptime are some of the benefits that users get on decentralized exchange, which they cannot enjoy with centralized exchange.
With an emphasis on how recent the blockchain technology is, especially looking at decentralized exchange, it is worth appreciating the far that the industry has come. If the growth trajectory remains, the same, intermediaries and banks might soon be done away with. The decentralized exchange is still a work in progress, and with a future that is hinged on decentralized economies, the best is yet to come.