With the passage of time the landscape of cryptocurrency trading is changing. With notable features like top-notch security and user’s privacy, decentralized exchanges are capturing the crypto market. According to the research, decentralized exchange will replace centralized exchange completely in upcoming years. In this article we will discuss decentralized exchange in detail and cover the following topics.
• What is a decentralized exchange?
• The basic difference between centralized and decentralized exchange.
• The problem with the centralized exchanges
• The benefits with decentralized exchange
• Reason for slow adoption of Decentralized exchanges.
• Things to consider when choosing decentralized exchange.
What is Decentralized Exchange?
Unlike centralized exchanges, decentralized exchange allows users to trade cryptocurrency without losing ownership of the token. Due to the Blockchain technology one can do trade in a secure and transparent manner, and without a single point of failure.
The basic difference between centralized and decentralized exchange:
Centralized Exchange:
• Exchange controls your fund.
• Trading happens through exchange.
• Users cannot remain anonymous while trading in centralized exchange.
• Centralized server
• Prone to hack
• Centralized exchanges are subject to government interference.
• There is limit of account withdrawal.
Decentralized exchange:
• Users remain owner of their fund.
• Trading happens through peer-to-peer.
• Users remain anonymous while trading in decentralized exchange
• There is no centralized server, rather it is a distributive network
• Decentralized exchanges are highly secured, so there is no chance of hacking.
• No government interference.
• No limit of account withdrawal.
The problem with the centralized exchange:
Security:
Due to the centralized server, centralized exchanges are vulnerable and prone to hack. According to the research, 73% of centralized exchanges take custody of user funds, while 23% let users control keys. This arise the security issue and hackers target such exchange to steal funds.
The problem of liquidity:
According to the research there is also problem of liquidity with centralized exchange. Because compare to the traditional market at an all-time-high, volume remains low. Besides, trading volume distributed into a few main marketplace, so no clear market leader in term of volume, which increases the liquidity problem.
Risk:
When it comes to dealing with the larger volume, then several risks like potential performance issues, market manipulation, hardware failures, latency problems, and many other inherent problems associates with centralized exchange.
Lack of transparency:
Lack of transparency and trust also a serious issue with centralized exchange. Because the process of trading and actual cost with centralized exchange is opaque where you have no idea that what is the actual transaction fee, even they can front run orders which is illegal.
The benefits with Decentralized exchange:
• Decentralized exchange offers trustless transactions. Here exchange will not control your fund, rather user will remain owner of their token and they can control it.
• While trading on centralized exchange, you can’t own your purchased token until you withdraw them in your personal wallet. On the other side decentralized exchange allows you to control your fund all times and can trade coins and tokens in a peer-to-peer setting.
• The distributed nature of the network eliminates the chances of hacking and server down time. Apart from that, decentralized exchange ensures transparency in trading and offer minimal fees compared to centralized platform. Besides, decentralized exchange allows users to trade without disclosing their identity.
Reason for slow adoption of Decentralized exchanges:
Despite of top-notch features two factors slowing down the adoption of decentralized exchange. First one is lack of awareness about decentralized exchange and second is technology.
Lack of awareness:
• Drawbacks and security issues of Centralized Exchanges
• Security measures to undertake (how to manage private keys etc.) since it is users’ responsibility
• Existence of Decentralized Exchanges
• Advantages of Decentralized Exchanges
Technology:
• In term of usability decentralized exchanges are not user-friendly.
• Possible Blockchain bloat with Ethereum network congestion and scaling pressure (with Token sales and a slow gas price adaptation…)
• The transaction time of the decentralized exchange is slow. Sometime transactions take time to be validated on Blockchains.
• Problem of liquidity.
• Some services have to remain off-chain and have to suffer from limitations of centralized infrastructures
• Miners can preview transactions, since they validate them, which can lead to market manipulation.
• Interoperability needed for decentralized platform to interact with each other.
• Need for fiat integrations and stable tokens for lower volatility.
Things to consider when choosing the decentralized exchange:
As the market of decentralized exchange is getting bigger and mature, likewise decentralized exchanges vary according to usability, fees, customer assistance, and even the digital currency by support. So in this section we are including some factors that you should consider while choosing the decentralized exchange.
• When it comes to usability then decentralized exchanges are not easy to use. In this scenario it is advisable check usability of the exchange and make sure that you are using it without any hassle.
• Check the security features of the decentralized platform, because some platform offers additional security features to protect your funds. For example some platforms allow you to directly link your hardware wallet to the trading contract.
• Make sure that exchange is supporting your desired token that you want to trade on the platform.
• Check the trading fee of the platform or any other charges that may apply to transactions.
• Check the sign up process, like which kind of details you need to provide and how quick the registration process is.
• Check the review of the platform from other users; this will give you a precise idea about the platform.
The bottom line:
Now more than 90% cryptocurrency trading is happening through centralized exchange and in future this trend will change completely, because due to some top features decentralized exchange is influencing people to change their opinion and they are moving toward decentralized exchange for cryptocurrency trading. Definitely, when it comes to usability then decentralized exchange becomes complicated to use but heavy research is going on to make decentralized exchange user- friendly and in future this technical hurdle will overcome. In this article we have covered all those relevant things that will help you to understand the decentralized exchange is a better manner. We hope this guide will help you.
