Calling Out Fake DEXs
Decentralized exchanges seem like a no brainer,
but we’re still not seeing the kind of volume you’d expect from a much needed tool, and they still have a long way to go in fulfilling their purpose.
There is a problem when exchanges label themselves as decentralized when in reality they really aren't.
Centralization comes in different varieties, let’s explore this so we can all identify the weakness and demand better options.
Before I get into today’s blog post I just want to go over some announcements.
- I will be on Naomi Brockwell’s Live Crypto Quiz Show Tuesday (October 16) afternoon at 3pm Eastern time if you’d like to tune in and check that out, you can find it on her Youtube channel: Naomi Brockwell.
- I will be interviewing Thomas Lee of Fundstrat on Friday, so if you have any questions you’d like me to ask him please feel free to leave them in the comments down below.
Ok, back to the good stuff.
Dex’s or decentralized exchanges have been a buzzword in this crypto space for several months now. The increase in KYC/AML identity requirements as well as the countless hacks and thefts that have plagued the popular centralized exchanges have certainly helped spotlight why decentralized exchanges are needed.
I can imagine that the idea is to facilitate increased decentralization as these exchanges scale.
Even Bitcoin at the beginning was very centralized, only a few people were running nodes and mining. But there’s a very important detail that should not be overlooked or underestimated, and that is the fact that bitcoin was designed to become more decentralized as more people joined the network. It was not designed to be confined or to have limits on how decentralized the network could become.
I mention this because every crypto project or exchange begins in a centralized manner. The trick is to get past it and move on to the green pastures of decentralization.
So keep this in mind when analyzing cryptocurrency projects, especially when considering decentralized exchanges.
Here are some ways that an exchange claiming to be decentralized can prove itself otherwise:
Does it act as a custodian for your funds?
- Do you have to deposit your coins into a wallet on that exchange? Are you trading with your actual coins or are you required to deposit your coins and then issued IOU type tokens that the exchange is ultimately in control of?
If this is so, it’s certainly a form of centralization that requires you to trust that exchange to store your real coins in a way that hackers cannot reach them.
Does it host its services on a website?
- If so, you’ve now been warned that if this is the case, you better hope that they use secure web hosting services. If you’re not sure why this would be an issue, take the time after this video to research what happened to EtherDelta and MyEtherWallet. Both suffered attacks due to their reliance on certain weak web hosting services.
Does it have a public figure head/CEO (someone who can be pressured to require KYC info)
- I know it’s easy to slip into that sense of comfort knowing who exactly is the captain of the ship, but when we’re dealing with decentralized networks and the fact that their strength is found in decentralization, it’s not that much of a leap to understand that one person declared in charge is a weak point. Despite all the good that Erik Voorhees has done for this space, he is an unfortunate example of how this concept can dramatically effect the future of these exchanges and networks. If you’re not sure what I’m referring to, take a look at the recent changes ShapeShift has decided to undergo.
Can it control your funds or trades at all? (Ex. Bancor freezing trades)
- Bancor is a relatively well-known decentralized exchange built on the Ethereum network, yet this one has the ability to freeze trades. Despite the fact that they froze these tokens in order to prevent a hacker from attaining even more coins, the fact they were able to do this sounds like some centralized control if you ask me.
If it is a protocol (like Ethereum’s 0x) remember that those who build on top of these protocols aren’t required to adhere to decentralized best practices, or even to allow for their software to be open source.
I’m going to end this video with a thought nugget I’d like you to consider, it has to do with the volume on DEX’s, or rather the lack thereof.
I’m sure this is partly due to a crappy UI that many of these exchanges have, but perhaps this is more of a reflection of the fact that bots dominate most of the trading on the popular centralized exchanges.
Foremost, the speed. Then the cost of transaction and add to the top, the technology issues.
I lost my account ( I do have the username and pwd) but they say user name coudnt be found. Fortunately I lost only small amount of coins..
The exchange I had issue with was cryptobridge!!! who ever built that crap!!!
Thank you for useful info...:)...
Awesome job on the show today!
What kind of guitar do you have? 😄
Decentralized exchanges are not user friendly. Hopefully the upcoming exchange Zeldex will solve that.
What about waves platform (and DEX built in)? Seems to work great.
I would consider number of active users to be the primary factor in determining volume. This in itself is determined by trust i.e. how much each DEX is trusted. This is not merely a factor of how secure or decentralised it is, but rather of how well known and well marketed it is (not a usual DEX forte).
I think that we will see a major volume increase with time after a few things have happened:
I have been calling out Bullshit DEX's since the start. But what do I know.
I think that one of the biggest barriers to start using a decentralize exchange is that they are not user-friendly yet and also the user need to have a high level of knowledge to know how to to a trade.
Leadership in Decentralized Organizations is a real challenge and without strong leadership in a quickly changing technological environment it can be hard to succeed. There is a very complicated balance. Many projects succeed for a time, but building strong teams and consistently rewarding people is difficult. Most organizations have to constantly reinvent themselves in order to survive. It is hard for a decentralized organization to make big changes.
Another thing one needs to consider is actual trading verses wash trading. Many exchanges -both centralized and decentralized have lots of wash trading. Wash trading is trading back and forth between two account to make the exchange look busy. (Wash trading on the US stock market is illegal). I have seen entire fake exchanges will millions of dollars of fake volume.
I will always wait for recognition and volume before I trust a DEX. As of now I am hoping Binance can succeed but maybe another exchange gains the trust of the people. All I know is I will not be an early adopter of an exchange. I'll wait some time and once it gains my trust I may use it myself to test out if its truly decentralized.