The Rise of the Decentralized Exchange: Why they’re important and who is leading the way.
In the world of the public, permissionless blockchain, decentralization is key.
Blockchain developers aim to design systems where power & control will be distributed as evenly as possible among as many participants as is practical.
Why is this desirable? Because blockchain relies on the consensus of the majority to decide on the objective truth recorded in the ledger. Pubic blockchains are open networks in which anybody may participate, so if more than half of the network power is able to collaborate, it can control the objective truth. That’s very bad.
The result of proper decentralization is a secure, stable & trustless system in which all participants can have certainty on the integrity & immutability of transactions. This provides a solid foundation of trust in the data, allowing crypto-assets to become secure, sound money and enabling an untold number of applications to be built on top.
Despite all of that…
More than 99% of all crypto-asset trades happen on centralized exchanges (CEXes) like Binance & OKEx.
These exchanges are like honey pots to bears. They store hundreds of thousands of their customers crypto-assets in wallets managed on central servers and so, inevitably, there have been breaches. Mt. Gox and Bitfinex have suffered the biggest and most high profile hacks to date, losing US$350 million and US$ 66 million worth of their customer’s assets respectively.
Bears gonna get that honey Image credits
Even if these CEXes keep a high proportion of the crypto-assets in cold storage (offline) it does not guarantee security. The bottom line is that the higher the concentration of wealth that is stored in one place, the more effort criminals, scammers and hackers will put into gaining access to that wealth.
So why doesn't the decentralized blockchain world use decentralized exchanges (DEXes)?
In a nutshell, because very few projects have figured out a way of making the user experience on a DEX comparable to that of a CEX.
For traders, the key metrics are: -
a) speed of trade execution,
c) interface usability
To achieve the expected levels in each of these metrics is significantly more challenging for developers in a decentralized environment.
Luckily, there are projects that have been working on this and some have made significant progress. The increasing prominence of these projects coupled with the demand from the crypto-community for DEXes, has brought this topic to the headlines in recent months. Even Binance — the biggest CEX in the world by volume — has announced that it will develop its own blockchain that will allow it to eventually become a DEX.
Who is leading the way in developing the ultimate DEX?
In short, Waves. The Waves DEX is an intuitive and fast, trading interface with an ever-increasing number of asset pairs available. The Waves DEX is an integral component of the overall Waves project that is a one stop blockchain solution for the tokenization of all assets.
Image courtesy of Waves
So how does Waves achieve the best of both worlds?
Firstly — Speed. Waves DEX is built on the Waves blockchain platform which is the fastest production blockchain in the world. It is currently rate-limited to 100 transactions per second (tps) based on minimum node hardware requirements but it can be upgraded to 1,000 tps when that becomes necessary. Compare this with Ethereum’s maximum capacity of 20 tps and you can see why some DEXes built on Ethereum are struggling.
Compounding this, Waves allows users to nominate a web-based trade-matcher. This speeds up trading while keeping the trade purely peer-to-peer, where assets are always in the hands of the participants.
Secondly — Integration. The Waves client is a wallet, token launcher and DEX all-in-one. There is no need to transfer funds from your wallet to the exchange as it is all integrated. So trading is simple, convenient and secure. The user interface of the exchange integrates charts from TradingView — widely considered the best charting tools available online — with full functionality.
A peak of the trading console within Waves DEX
Thirdly —Low fees. Currently the execution of a trade costs 0.003 WAVES, which today equates to one tenth of a cent in US dollar terms. This fee is flat and does not depend on trade size so for large trades you could be looking at fees in the order of millionths of a percent. That’s incredibly cheap.
Fourth — Inclusiveness. The number of major fiat and crypto asset gateways on Waves DEX is ever increasing, meaning more opportunities for more people to trade. On top of the usual USD and EUR gateways, there are Indonesian and Turkish fiat currency gateways and African fiat gateways are in the works.
In terms of crypto-asset gateways, Waves have prioritized the major pure-play currencies. Some example are Bitcoin, Bitcoin Cash, Litecoin, Monero, Dash and ZCash. The only crypto-asset currently listed that is not a pure currency is Ethereum.
Beyond major assets, all token assets launched on the waves platform are also automatically available for trading through the DEX as a WAVES/TOKEN pair. There are literally thousands of these native Waves token assets, including countless ICOs that have launched on Waves as well as many community projects.
The Waves team says that it will soon be releasing smart contracts onto the mainnet which will enable atomic swaps — this will allow any asset on any other blockchain to be traded on Waves DEX without the need for gateways to be set-up and administered.
Fifth — Longevity. The Waves team have been developing their product for a looong time — it’s been live for over 2 years and they have already reached the 44th iteration of the beta client. This means that they have been improving performance, features and usability with live community feedback and have long-since ironed out major bugs. The longevity of the platform also equates to a larger user base meaning higher volume and liquidity giving a better all round trading experience.
What about the competition?
Beyond Waves there are other notable DEX projects in varying stages of development of user adoption. The picks of the bunch that are up and running are BitShares, IDEX and Bancor, while 0x offers a base protocol that is being widely used for DEXes running on the Ethereum network.
BitShares has similar volume to Waves DEX but it is heavily dominated by its own token, BTS, trading against the Chinese Yuan and other important fiat currencies. This accounts for around 99% of all trading volume which suggests that this platform is not used as an all-round asset exchange.
Idex is the next highest volume DEX with US$3–4 million per day but it only supports Ethereum ERC20 assets which is a limitation if you are looking for a one-stop solution. Having said that if you only want to trade ERC20, then IDEX is probably a good place for you as it has more than 300 trading pairs.
Bancor achieves between US$2 and 3 million per day but this is heavily skewed by one trading pair — it’s own token, Bancor (BNC/ETH) — accounting for nearly half of the traded volume.
0x is protocol that is based on Ethereum and allows any ERC20 assets to be exchanged off-chain — getting around the high transaction fees and low capacity of the Ethereum mainnet. Many of the ERC20 DEXes are built on top of the 0x protocol, including Ethfinex and RadarRelay. However currently this is quite a limiting factor because an all round exchange should offer asset trading across multiple platforms, not just Ethereum. 0x do have a roadmap for this.
There is no doubt among the blockchain community about why decentralized exchanges are essential and even the most centralized players are starting to realise that. While it is generally an immature space, even for blockchain standards, there have been some promising developments and the team at Waves has so far made the standout impression with their product offering surpassing the competition in terms of usability, trading performance and adoption.
As with so many areas of blockchain technology, there is so much more to come and it will be exciting to monitor this space as it develops in parallel with other improvements like blockchain scaling and cross-chain solutions to name a few.