Decentralized Crypto Exchages vs Centralized Exchange Like Binance or Bittrex?

Decentralized Crypto Exchages vs Centralized Exchange Like Binance or Bittrex?
Sudhir Khatwani

Decentralized Crypto Exchages vs Centralized Exchange
The biggest threat to cryptocurrencies in not volatility, but the living reality that 99% of cryptocurrency trade still happens on centralized exchanges.

And sometimes I think how contradictory it is to use centralized exchanges like Binance or Bittrex against the ethos of decentralized cryptocurrencies.

Kind of joke and shame that the whole purpose i.e. monetary sovereignty for which Satoshi Nakamoto created Bitcoin is still at the helms of centralized parties.

But now I think the time is not very far when we see this trend changing, in fact, it has started to change as numerous decentralized exchanges are proliferating with their different approaches.

Well, but why do we need decentralized exchanges (aka DEX)?

I am not going to answer this again in this article but would like to leave you with a link where I have spoken extensively about the pros and cons of both the types of exchanges.

Here you go: Why Are Decentralized Exchanges The Future Of Cryptocurrencies?

Now that you have read this aforementioned article it makes sense in talking about centralized and decentralized exchanges from a deeper perspective.

Centralized Crypto Exchanges

We all know about some famous centralized exchanges such as these:

No doubt that since the beginning centralized exchanges made cryptocurrencies like Bitcoin, Ethereum etc accessible to the masses around the world. And I am also acknowledging the fact that they did a very good job in providing the much need push and liquidity to crypto markets.

Centralised-exchanges

But they also had their fair share of criticisms and failures too. Some of these failures were:

Exchange hacks: More than 30 cryptocurrency exchange hacks in last 9 years and some of them as big as Mt.Gox, BitGrail, Coincheck etc
Govt Banning: the China ban, the Korea ban, and the Russia ban etc.
Poor Support: This is known to everyone…who has used a central exchange.

These bans and hack like, a central point of failures happen because when you buy cryptocurrencies on centralized exchanges like Bittrex or Binance, you don't own them actually. It is so because these exchanges don't give you the private keys of your funds instead they just credit appropriate crypto numbers against your order. (Read more about private keys here.)

Also, there is an additional headache of KYC compliance and identity document submission that one has to do while using such centralized services. And this opens another vulnerability of identity theft or your personal identity information getting leaked via centralized exchanges.

And not only this, nowadays popular centralized exchanges are not listing most of the ICOs or token sales because of the increased regulatory pressure from the US SEC and rest of the world. Exchanges like Bittrex and Poloniex has not listed any ICO token for many months now and this can create liquidity problems for even good ICOs or token sales.

Fun Fact: Decentralized exchanges can list any ICO or token because they can't be shut down as there is no single point of failure in their model, there is no server at all to shut down.

Decentralized Exchanges (DEX)

And because of the aforementioned limitations and issues, I kind of agree with what Vinny Lingham recently said in his tweet.

I'm almost certain we will see a top 25 crypto exchange fail or be shut down in the coming months. This will be the catalyst for the emergence of decentralized exchanges and this is a key theme I'm expecting in 2018.

— Vinny Lingham (@VinnyLingham) January 18, 2018

Of course, not all exchanges might fail but the failure of some major exchanges coupled with governments cracking down on centralized exchanges can catalyze the emergence of decentralized exchanges.

But yeah, the reality check is that we are not there yet despite many decentralized exchanges in production. It is so because decentralized exchanges are having all the inherent limitations of blockchain tech and one of them is scalability.

Some of those decentralized exchanges and protocol are:

Also, almost all decentralized that are in operation today gives you the feeling of old-age internet websites that are too slow and sometimes unusual due to lack of enough traffic on it. And when on an exchange you don't have enough buyers/sellers that means it is akin to the death of that platform.

But as I said before that crypto regulations, bans and hacks, all this will catalyze the development of decentralized exchanges. And you should definitely expect to see better user experience and liquidity on DEXs because smart contract techs like off-chain atomic swaps and on-chain atomic swaps are going to make the exchange of cryptocurrencies, peer to peer and trustless in some time from now.

Conclusion

Decentralized exchange soon will be a household name in the near future because that's the only wy cryptocurrencies can thrive despite ban and regulations.

And the development of so many DEX and DEX protocol clearly shows that the pioneers of cryptosphere have realized it, if cryptocurrencies need to go mainstream beyond the FUD then we will definitely require peer-to-peer censorship resistant decentralized exchanges in the market.

But there is a problem that exchange of cryptocurrencies into fiat currencies like USD, EUR etc is a lot harder to decentralized because systems like US Dollar itself are centralized.

And that's why you see so low volumes on exchanges like:

LocalBitcoins &
Bisq

Interesting, this problem can also be solved by having cryptocurrencies that are pegged to fiat currencies. The classic example of such a cryptocurrency is Tether but recently Tether has been accused of market manipulation as it looks like they don't have that much actual USD reserves in proportion to the actual Tether (USTD) that they have issued.

But this can be done easily in a fair manner by keeping a stringent auditor in place and already some of the fiats pegged currency projects are coming up that provide much need liquidity, fairness and fiat interaction that is needed in the market. And this will definitely serve as a cure to fiat on/off ramp problems that decentralized exchanges might run into the future.

So you see all the missing pieces for making the robust infrastructure of decentralized exchanges are coming together. That's why it is wise, not to do away with decentralized exchanges from now on, no matter how good your favorite centralized exchange is.

Now it's time to hear from you: What do you think about centralized and decentralized exchanges? Which DEX project are you following/using? How has your experience been? Did I miss any good DEX projects on this list? Do let me know your thoughts in the comments section below!

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