Can decentralized exchanges solve crypto’s liquidity problem?
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By Andre Pemmelaar, QUOINE Chief Trading Officer
Katherine Ng, QUOINE’s Head of Marketing, was part of a panel at SUSS FinTech and Blockchain recently to talk on the topic of trends of tokenized securities and decentralized exchanges.
Most people on the panel said they believe that decentralized exchanges can provide the solution for liquidity for crypto-only trades and that centralized exchanges are less secure, citing Mt Gox and Coincheck hacks as examples.
Loi Luu, co-founder and CEO of KyberNetwork, wrote an interesting blog post on this topic last year titled Solving the Liquidity Challenge of Decentralized Exchanges.
Weighing up the options
Decentralized exchanges are offering a solution to one problem: the risk of losing control of your crypto due to exchange counter-party risk. The client maintains custodial of their tokens and swaps them on-chain so their risk of losing their crypto due to a hack of the exchange, or bankruptcy, or some other negative exchange event is largely eliminated. This also eliminates the need to deposit and withdrawal, which is convenient.
But now you take on several negatives:
If you have a problem there is no way to reverse it. No support to fix it. No one to address your concerns and right wrongs.
Your wallet can be hacked too. Sometimes an exchange’s custodial is safer than your personal wallet. The ETH wallet hacks last year are an example of this.
Potentially all your trades are public.
Liquidity providers find it much harder to provide liquidity given the current technical offering. Price discovery and order updating is very, very slow and there is a great danger the market maker will get “run over” if they can’t cancel in time. This leads to poor, highly defensive liquidity provision by market makers, leading to a general lack of liquidity.
Personally, I think the “hybrid” is a better approach. You maintain custodial of your tokens but actual price discovery and trading takes place on a centralised exchange. Settlement happens on-chain after the trades have completed.
This is the best of both worlds and is one possible direction LIQUID and the QASH DLT might take in the future.