Liquidity Issue in Decentralized Cryptocurrency-Asset Trading and the 0x Project

in blockchain •  4 months ago

Liquidity logo.jpg

Introduction

In the cryptocurrency market we have exchanges that make cryptocurrency-assets available to holders, traders, and investors (in general, users) for blockchain asset swaps (trading, selling and converting). These exchanges can be categorized according to the protocol in which they operate. The exchanges that operate in the more traditional internet protocol are Centralized Exchanges such as hitbtc; Bittrex; Poloniex; Bitfinix etc. Centralized Exchanges currently dominate the cryptocurrency-asset trading market. The other category are non-centralized exchanges that operate in a decentralized protocol which is the blockchain. Examples of such decentralized exchanges are ether delta, solely operates on the ethereum blockchain; bitshares etc.
Decentralized Exchanges provide a trading platform, for peer to peer transactions, that has no central point of failure unlike a centralized platform.
With the advent of security breaches that have occurred at centralized exchanges such as Bitfinix and Mt. Gox; and the recent spread of rumours about Poloniex not being secure (which may or may not be true), have in no doubt raised concerns about the security of cryptocurrency centralized exchanges. These have created a demand (or market) for the development of decentralized exchanges
Decentralized exchanges are in no doubt a secure exchange for cryptocurrency, but there is a current issue with a decentralized exchange, and that is Liquidity
Apart from centralized exchanges that share liquidity with decentralized exchanges the cryptocurrency market also has another crypto currency converting platform known as Shapeshift.

Liquidity

Decentralized trading platforms currently lack the availability of asset, after all since these platforms are not as popular as centralized platforms; and being peer to peer amongst at most individuals and not popular between cooperate entities, it is difficult for individuals to have enormous amounts of several assets at any point in time.
This problem has already been demonstrated with the recent sudden drop in price of one of the best performing assets of 2017, Veritaseum.
A few weeks ago, at ether delta decentralized exchange, Veritaseum expressed some sharp fluctuations in its price due to huge sell orders all occurring at roughly the same time. There were reports by individuals who tried to buy Veritaseum at the low that the buy orders were not going through; or, if they did go through there was a lot of slippage.

Another problem with decentralized exchanges is the cost of operation. Taking ether delta that is built on the ethereum blockchain, the cost of carrying activities on the ethereum blockchain is termed as GAS. A $120 trade transaction may cost roughly about $0.40 this fee is very little but may be huge if the transaction is huge as well.

0x Project

0x Project logo.jpg
0x is a cryptocurrency-asset that started its Initial Coin Offering (ICO) on 15th of Aug (UTC).
0x is a protocol for decentralized exchange on the ethereum blockchain.
The 0x Project could provide liquidity to all Decentralized Exchanges. The 0x team are examining the liquidity issues of cross blockchain connections. If this project is successful, that will mean more money flow between exchanges via a decentralized exchange.
In the ethereum blockchain, where many tokens emerging today in the cryptomarket are built upon as ERC 20 tokens, there are lots of decentralized exchanges that provides swaps of these various tokens. Most of these exchanges take liquidity from each other.
So the 0x project aims to provide a solution for this decentralized liquidity issue by enabling the use of a common smart contracts, optimization trade operations etc by all blockchain exchanges on ethereum. This will ease arbitrage in between exchanges.
The protocol orders are off the blockchain. So the platform of initiating an order can be through centralized websites such as twitter, facebook, email etc. Thereby creating a sense of ease to users in utilizing a decentralized exchange.
0x provides smart contracts to users to carry out an order at an ethereum wallet without any GAS cost until the order is accepted by another pier.

Possible Network Effect of 0x

The tracking of any exchange’s network effect is its liquidity. Centralized exchanges currently have the most liquidity for a given trading pair. Decentralized exchanges will have to have more liquidity for most given trading pairs compared to that in a centralized exchange.
Easy-use of an exchange is an issue when it comes to user’s choice. The experience of using a centralized exchange is easier than using a decentralized exchange because, in a decentralized exchange, the user has to interact with the blockchain of which the exchange is built upon. For example, to trade at ether delta, one needs an ethereum wallet such as Metamask. Metamask can be downloaded as an extension on the google chrome browser. Hence the private key of the user remains only in its wallet, and not in the wallet of the exchange unlike a central exchange.
So the task for decentralized exchanges to take liquidity from easier-to-use centralized exchanges is a hard task.

Possible Issues on 0x

Watch the link at References_Possible Issues

Conclusion

If decentralized exchanges can win over huge transaction volumes or transfers from other current traditional crypto swap platforms such as shape shift and centralized exchanges; and undergo a network effect in the crypto market, secure cryptocurrency-asset exchanges will be able to provide trading platforms for more users around the world. Thereby increasing the facilitation of the Adoption of Cryptocurrency by the mainstream global economy that is currently sitting on market capitals of trillions of dollars.

References
https://www.0xproject.com
https://shapeshift.io/#/coins




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Actually looks like a pretty cool project. I'll be looking into this.

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