In 2015, Bitstamp, a popular crypto exchange encountered a hack and incurred losses upwards of 19,000 BTC, a crypto-equivalent of USD 1 million! In 2016, another crypto exchange, Bitfinex, widely known for its multi-signature technology, suffered a hack which resulted in losses close to 120,000 BTC. More recently, CoinSecure exchange experienced a similar attack wherein the perpetrators managed to steal 438 BTC from the customer’s exchange-aligned wallets.
Do you know what is common between all these instances?
They all occurred on Centralized Exchanges (CEXs), an entity similar to a bank which serves as an intermediary for transactions, maintaining crypto balances and facilitating transfers through its one central unit.
While there’s a lot that deserves credit and applauding when speaking about CEXs, rampant instances of security breach have caused crypto traders to demand better of the ecosystem. More and more crypto transactors are flocking to the simpler ways of the decentralized exchanges (DEXs), even if it’s for small trades, for the sake of secure transactions, enhanced trust and a pure play peer-to-peer ecosystem where there’s very little room for failure as well as monetary loss.
Decentralized currency exchanges are called so for the reasons that there’s no one entity that “owns and manages” it all. A decentralized cryptocurrency exchange merely serves as the ‘enabler’ of trade or transactions.
A small gas fee is charged per transaction and funds as well as tokens move securely directly between users via crypto-compliant wallets. One such decentralized exchange is WandX – a peer-to-peer platform on decentralized ethereum blockchain for enabling the seamless creation of and trade in ERC20 Token baskets. WandX token baskets happen on a proprietary protocol that allows traders to club multiple ERC20 tokens into baskets and enable one-go trades.
Decentralized platforms like WandX only charge for facilitation, and in return, offer far better opportunities and methods of trading and accumulating decentralized exchange tokens and other crypto assets; the ecosystem ensured through trustless-ness and network strength.
The reason why decentralized exchanges like WandX win over Centralized exchanges are five-fold:
Agility Earlier in 2018, Kraken, one of the world’s most significant centralized exchanges announced that it would be offline for two hours for system maintenance, but its service did not resume as expected. This resulted in considerable loss of trade. Had this been a decentralized exchange, traders could have quickly moved with their wallets to another decentralized platform to resume trade since they and only they hold and manage their crypto wallet private key, not the exchange.
Anonymity Some centralized exchanges allow anonymous trading accounts on their platform. However, recent federal rules and regulations have forced these exchanges to adhere to KYC and AML laws, affecting the anonymity of users. In case of decentralized cryptocurrency exchanges, a user does not have to give their personal information in order to conduct trade. On a DEX, their personal identity is better protected and so is their credit information.
Security In recent years, CEXs have been victims of major scale crypto hacks. Mt.Gox, one of the biggest bitcoin exchanges, in the world lost more than USD 400 million of their user’s money due to this. For the reason that CEXs are single points of failure they tend to be far more prone to digital threats than a DEX. DEXs, on the other hand, supported by the strength of the nodes, are far more rift-resistant.
Cost efficiency The elimination of third-party authenticator in a decentralized exchange speeds up the process of the transaction and cuts down the fee. Centralized exchanges tend to charge a percentage of the trade value that range anywhere between 0.25% to 3% of the trade. Being a central point of facilitation, CEXs suffer downtime frequently and, as a result, trades move stealthily. In DEXs on the other hand, the P2P transactions happen transparently and in a cost-effective manner.
Downtime Downtime happens in an currency exchange when the technology is unable to cope up with a surge in trading activity. Many centralized exchanges have faced this problem. However, decentralized exchanges work in a different way- whenever more people log-in to transact, it adds more nodes and strengthens the network, thereby increasing the computational power of the system itself.
Limitations of Decentralized Exchanges
Now, for all the talk of peer-to-peer trade facilitation and enhanced security, DEXs are not without limitations. Liquidity, for that matter, is one of the key deterrents to DEXs going mainstream. DEXs are also known to be complicated, and dashboard proficiency is a must to win with DEXs, even if initially.
However, these are still early days for DEXs. As more and more enterprising exchanges emerge, DEXs will evolve into a simple and significant ecosystems for mass crypto trades. Already, decentralized platforms like WandX are leading with innovative crypto financial instruments that help manage token-related risks and enable digital asset accumulation better. Also, as smart contracts and Dapps gain widespread acceptance and adoption, DEXs and smart contract-enabled technologies will become norms in the days to come.
Thanks for reading!
Manish Sahu – Community Manager at WandX