The Coming Wave of Decentralized Exchanges
The future will be shaped by new-age decentralized exchanges. Liberty Finance DEX welcomes it!
The cryptocurrency exchange ecosystem has come a long way in the past few years. There are now hundreds of exchanges and trading platforms catering to different types of users and their needs.
However, the centralized nature of these exchanges comes with inherent risks. They are prone to cyberattacks, user data is stored in a single location and the failure of one exchange can have a negative impact on the entire industry.
As such, there is growing interest in decentralized exchanges (DEXs) as an alternative. In this article, we explore what DEXs are, why they exist, and where they might go from here, as well as an early peek into the plans for Liberty DEX.
What is a Decentralized Exchange?
A decentralized exchange (or DEX) is a market where cryptocurrencies can be traded without the need to trust a third-party intermediary. The most basic DEXs are simply crypto-to-crypto platforms, but some more ambitious projects aim to create an entirely decentralized financial ecosystem.
Most DEXs are built on open-source blockchain protocols, and some are fully decentralized with no central operator controlling the marketplace. The key difference between DEXs and centralized exchanges (CEXs) is that in DEXs, users retain control of their funds throughout the entire process.
The Ethereum-based decentralized exchange protocol 0x (ZRX) provides a good illustration of what this process looks like. In this case, the 0x protocol serves as a decentralized exchange on which users can trade ERC20 tokens. To do so, the user must first deposit their funds into a smart contract (this is standard practice for DEXs). After that, the user can browse the decentralized exchange and “place orders” for specific trades. The user holds the other user’s funds as “collateral” until the trade is completed or canceled.
How Does a DEX Work?
The basic idea behind DEX is that users will keep control of their own funds at all times.
A decentralized exchange is a peer-to-peer marketplace where transactions take place directly between cryptocurrency traders. DEXs fulfill one of the main capabilities of cryptocurrencies: promote financial transactions that are not arbitrated by banks, brokers, or any other intermediary.
Many popular DEXs, like Uniswap and Sushiwap, run on the Ethereum blockchain.
The only drawback is that users can’t withdraw their funds from a DEX at any given moment. The funds remain locked in the smart contract until the trade is canceled or executed.
Why Existing Exchanges are Centralized
There are two main reasons why existing exchanges are centralized.
First, it’s much easier and cheaper to set up a centralized exchange than a decentralized one. DEXs require complex technology and a robust ecosystem to even start working.
Second, centralized exchanges attract the majority of the market and often bring in the most profits. Out of the three main types of exchanges, investors prefer centralized exchanges (CEXs) the most. However, DEXs have been growing in popularity in the past few years.
The Coming Wave of Decentralized Exchanges
Undoubtedly, DEXs will become more popular in the coming years. Most experts agree that decentralized exchanges are inevitable in the long run, but some see them becoming prominent much sooner than expected.
The main reason for this trend is the security risks and growing incidents of trust breaches in centralized exchanges. The most notorious case has been the ever-growing number of hacks and major breaches at centralized crypto exchanges.
In this sense, the increasing adoption of DEX is a “self-defense mechanism” in which users seek out more secure alternatives. There is also a growing sentiment among crypto investors that centralized exchanges are “inevitably doomed” and will cease to exist in the near future.
For many, decentralized exchanges are the only way to trade cryptocurrencies in the future.
Hence, the perfect opportunity for Liberty Finance to make its entrance. The future of DEX is going to be closely linked with the ability to provide the same functionalities as CEXs, all while maintaining the benefits of decentralization — precisely what the Liberty Finance DEX aims to provide.
Problems with CEXs
Currently, centralized exchanges are the “standard” way to trade cryptocurrencies. They are easy to use, have plenty of liquidity and allow users to trade in a wide variety of cryptocurrencies. However, they also come with a series of issues that might lead to their downfall.
Here are the main issues with centralized exchanges:
Security risks — Centralized exchanges store all user funds in one centralized location, making them prone to hacks and theft. In the past few years, we’ve seen countless numbers of security breaches and hacking incidents at centralized exchanges.
Ownership risks — Centralized exchanges are often controlled by a single company that decides how the exchange works and what new features are added. The owners of the exchange can also change the rules of the game at any given moment. At the end of the day, centralized exchanges are “money-making machines” owned by a corporation.
Exchange regulation risks — Centralized exchanges are under the watchful eye of financial regulators, who have the power to impose strict rules and regulations on these companies. This can sometimes lead to strict rules and policies that affect users.
Widespread adoption risks — Centralized exchanges are designed to appeal to the mainstream market, but they often have strict rules and policies. This excludes a large number of people who can’t meet the requirements set by centralized exchanges.
Negative impact on the network — Centralized exchanges have a positive impact on the network when they are small and growing. However, there are signs that the impact might be negative as large centralized exchanges grow larger.
Problems with Current DEXs
At the moment, there are a few decentralized exchanges in operation. The most notable examples of decentralized exchanges include Uniswap, Pancakeswap, and dYdX. However, decentralized exchanges also come with their own issues.
Here are the main issues with current DEXs:
Low liquidity — At the moment, most DEXs have very low liquidity. This means that it’s difficult to find matching orders and complete trades.
Low user adoption — Most existing DEXs have low trading volumes and are only used by a small number of users. Even though decentralized exchanges are more secure, they have a more complicated user experience.
User experience issues — Most DEXs have a more complicated user experience than centralized exchanges. This leads to a lower level of adoption and more issues that users have to deal with.
Conclusion
At the moment, centralized exchanges still have a strong position in the marketplace. However, many individuals and businesses are shifting toward decentralized exchanges due to security concerns. At the same time, many of the current DEXs are lacking in functionality and usability, which might lead to a loss of interest in the long term.
For decentralized exchanges to truly take off, they need to make the trading experience simple, user-friendly, and efficient. Moreover, adding functionalities like futures, stablecoins and other features will set in stone the clear advantages of DEXs.
This is what Liberty Finance DEX will provide for the market and its users, being one of the first to adapt and improve toward the coming wave of change.
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