It’s a sad fact that decentralised exchanges don’t work well – but a new generation of DEXs might have the answer, thanks to the benefits of… centralisation?!
Decentralised exchanges have long been held up as the antidote to the flaws of crypto’s centralised exchanges – namely hacking, theft, fraud, manipulation, wash trading, spoofing, insider trading and a whole host of other abuses.
The first true decentralised exchange was probably the Nxt Asset Exchange – a groundbreaking piece of tech integrated with the Nxt platform. It launched in April 2014, almost five years ago now, and allowed for the first time traders to exchange assets on a peer-to-peer basis. Orders were stored on the blockchain, making it completely transparent. Many of Ethereum’s decentralised exchanges since then – including EtherDelta – have operated on the same principle. Unfortunately, though, they haven’t caught on, and for good reason:
- Speed. The requirement for orders to be lodged on the blockchain means that trades are only executed when the next block in mined. That makes these exchanges slow and unpredictable, because you don’t know if your order has been filled until the next block.
- Cost. Recording all orders on the blockchain brings additional costs – and changing orders requires new fees every time.
- Front-running. A transparent orderbook means that users can jump the queue and grab orders before others by paying higher tx fees – or, if you’re a miner, by mining your own txs and discarding others. This practice is illegal in the conventional financial world, but it’s common in crypto – and profitable if done right.
What these factors mean in practice is that the first generation of decentralised exchanges – DEX 1.0 – are not fit for purpose. Consequently they lack users and liquidity, which makes them even less attractive. And who can blame traders for staying with centralised exchanges, despite all their many flaws? If you can’t guarantee an order will be met; if you can’t change an order without incurring a fee; if you have to wait a block to know whether your order has filled; if you’re being front-run by unscrupulous miners – then why would you bother? Better the devil you know.
The answer has been to use the blockchain for settlement, since this is secure and transparent, but match orders centrally for speed and privacy. That’s what the Waves DEX does, and it’s what ChronoBank’s new exchange, TimeX, is also doing. A centralised layer pairs buys and sells, without requiring orders to be posted on the blockchain. The results are dramatically more superior than for DEX 1.0, combining the speed of a centralised exchange with the security of blockchain settlement and peer-to-peer transactions. Waves DEX enjoys millions of dollars of daily volumes thanks to this approach – traders actually trust it and use it, rather than some of the decentralised Ethereum exchanges, which have just a few dollars of volumes.
So will centralised exchanges survive this new generation of DEXs? As ChronoBank writes, ‘It is likely that there will always be a place for centralised organisations in this space, not least because interfacing with the fiat banking system requires on- and off-ramps and therefore regulated entities — companies that operate within their own jurisdictions and legal frameworks. However, the crypto sector as a whole will benefit from greater transparency, since centralised exchanges are still opaque in their dealings and can readily fake key statistics such as volumes — as well as facilitating front-running, spoofing, wash trading and other illegal and unethical behaviour. Despite increasing professionalism in the sector, crypto exchanges still badly need to rehabilitate their image after many years of mismanagement and abuse of the customers and community they are supposed to serve.’
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