The philosophy of decentralization
Bitcoin is the first cryptocurrency based on blockchain, created as a peer-to-peer (P2P) payment system that allows its users to transfer value without the intervention of a central authority or a third party. The transactions are verified by network nodes called miners, avoiding censorship, falsification, fraud, double spending and guaranteeing transparency and decentralization at a low cost.
But are cryptocurrencies decentralized if we use centralized exchanges?
The answer is No. When Bitcoin and cryptocurrencies became mainstream, the need arose for platforms that would facilitate the exchange of FIAT money to cryptocurrencies. These platforms were growing, improving and evolving until reaching the platforms we know today such as Bitfinex, Binance and Coinbase. Of course, these platforms have solved the exchange needs of users such as miners, who sell part of their production to finance operations and investors who bet on the future of cryptocurrencies as an investment. The problem with the centralized exchange are the following:
- Regulations: users must go through a Know Your Customer (KYC) process to be able to operate in the countries of the most powerful markets such as North America and Europe. These regulations are not negative but some users may have their privacy affected by the initial cryptocurrency philosophy.
- Higher fees: although they are lower than the fees of many traditional financial services, they are greater than the fees for transaction on a blockchain network. For example: currently, the Bitcoin network fee is $0.01 per transaction but an exchange can charge up to more than $1 per transaction and/or a percentage per operation.
- Hack: we have seen how many times cryptocurrency exchanges have been hacked, causing losses to users. When a user sends cryptocurrencies to an exchange wallet, the users do not have their funds in their own wallets, the funds are actually being sent to the cryptocurrency exchange wallet in order to operate.
So, what is a Decentralized Cryptocurrency Exchange (DEX)?
Is a cryptocurrency exchange that does not depend on a third party service to retain customer funds or servers to store information. The exchanges operate directly between the users (P2P) by means of an automated software (open source) that facilitates the exchange operations.
Which are the advantages and disadvantages of a DEX?
The main advantage of DEX is privacy. The protection that now generates anonymity, returns to transactions difficult to track. The biggest exchanges have gone through heavy DDOS attacks, which in some cases resulted in the loss of hundreds of thousands of dollars worth in cryptocurrencies. With DEX, the user has complete control of their personal wallet, removing their personal information from the hackers.
Another advantage of DEX is the reduction of fees for maintenance. Although these exchanges need an income to sustain themselves, the expenses for keeping the cryptocurrencies of their users safeguarded in wallets of their property disappears, returning to the original idea of the blockchain, where you only pay the necessary fee for the transaction.
DEX are very new. The internal security system of a computer can send virus alerts because malware when a DEX works through the installation of a program for its operation (example: Bisq). Putting all the security in the hands of the users, and the protection of cryptocurrencies, imprudence is an obvious vulnerability that could easily become a disadvantage for some users. Users must learn to use how a DEX works to avoid being a victim of any vulnerability.
Another problem is the strong influence of established exchanges such as Coinbase, Bitfinex, etc., which makes it difficult to migrate to a DEX. Additionally, the most important current DEXs are developed to work on the Ethereum platform, such as IDEX or Etherdelta.
According to an analysis published on June 19, 2018, by the Consensys Media, IDEX concentrates the largest volume of trades. As additional data, its visual structure is similar to Poloniex. With IDEX, it is not necessary to download a program, everything works from a browser. Enter your Ethereum wallet as if it was a mining pool.
With all the transformations that have occurred in the world of cryptocurrencies and blockchain, it is evident that an evolution in the field of exchange is also promoted as the next step in the adoption of blockchain technology. Just as decentralized P2P money is handled, decentralized P2P exchanges will have to be handled