Probably you have heard about exchanges very much, and hopefully even trade on them. Now, this type of investment is considered the most favorable, and highly profitable. A marginal trading with the leverage is one of super-profitable and meantime high-risk tradings.
Decentralized cryptocurrency exchanges are only appearing in our world, and started relatively recently, in mid-2017. At the end of last year – the beginning of the current, crypto investors were impressed by their appearance through ICO. For example, one of the most famous AuroraDAO fundraised over 5400ETH (at the time of publication is $ 2.7M). And was almost $4.3M in February. Sounds impressive, does not it? Let’s now understand the difference between a decentralized cryptocurrency exchange and centralized cryptocurrency exchange, and why the future of decentralization.
Centralized Cryptocurrency Exchange
Centralized cryptocurrency exchange (peer-to-peer, P2P) consists of the following layers:
– User interface
– Administrative part
– Trading engine and matching engines
More details about the components of cryptocurrency exchange software you can find out from our previous article. The main essence of a centralized exchange is that it is the intermediary between the two roles of user-traders (taker and maker). This kind of exchanges makes money by obtaining a fee from each transaction (usually from 0.1% to 1.5%). The broker company controls the entire system, infrastructure and platform. In the case of hacker attacks, DDoS attacks or other unauthorized access, the exchange will suspend its work in order to secure user funds. All money is stored on the accounts of crypto-exchange, and in fact, it controls its activity, market, assets. Briefly, it controls everything.
The scheme of work is that first, the user maker interacts with the exchange by creating an order for selling, and the user maker interacts with the system to buy it. Classical scheme with an intermediary. So what’s different from decentralized?
Decentralized Cryptocurrency Exchange
The first and most important thing in decentralized cryptocurrency exchanges are trading without intermediaries. Users directly interact with each other: they buy and sell without any external persons. But how is this even possible?
From a technical point of view, the decentralized exchange is built based on the blockchain, which makes it a priori genuine. Each transaction in such an exchange is stored in a public ledger, and every copy of it is owned by every participant. The second, important point is that DEX does not have access to the investor’s assets, and therefore the attention of hackers to such an exchange will be minimized. Think for yourself, why crack a DEX to steal money if it does not have it? It’s just illogical.
The simplest example is FIAT currency and cryptocurrency (bitcoin for example). No one controls the Cryptocurrency, no one can fake blockchain, it’s too resource-intensive and almost impossible.
The architecture of the decentralized cryptocurrency exchange is completely different, and besides the superior advantages, there are a number of disadvantages.
Taking into account the fact that the exchange is not controlled by anyone, often in the design and construction of trust from the users of it make open-source. Such functionality as email integration cannot technically be implemented. Restrictions in trading, poor functionality is only the tip of the iceberg. If we can not use emails, then signup process with email becomes useless. 2FA integration via SMS impossible neither. The only thing that in this case will come to the rescue – Google 2FA (passcode).
Forget about margin trading. Decentralized cryptocurrency exchange is the simplest essence of an exchange.
Investing, exchanging and buying a cryptocurrency on such platforms is a much more complicated procedure on the part of UX. On the pleasant UI, you can also forget. Decentralized exchanges are still more or less accepted by early users, but require much more intervention to extend them to other, not technically savvy people.
In addition to mentioned issues, the main one is liquidity problems. Market makers or distributed liquidity with other platforms won’t work.
Blockchain as the foundation
Decentralized cryptocurrency exchange is more likely to be viewed from a technical point of view as a kind of DApp (decentralized application) built using blockchain (public or private). You can build blockchain from scratch, or upon Ethereum, Neo or any other. Blockchain is the foundation of your DEX, and the standard of its genuineness and integrity.
Costs, Tokens and ICO
Crypto investors following the ICO were probably able to catch an easy trend or rather a phenomenon. Attention to decentralized cryptocurrency exchanges is much higher than centralized. Binance CEO announced their steps towards creating this type of exchange. Companies smaller are conducting ICO to raise money to develop DEX.
Hybrid Cryptocurrency Exchange
Both cryptocurrency exchanges types – centralized and decentralized have own cons and pros. User-friendly, safe to the highest standard, with extend functioality. Exactly this Binance CEO has mentioned. You can forget about Cryptocurrency Security Standarts (CCSS). But how does the hybrid exchange function properly? Hybrid cryptocurrency exchange built upon blockchain and is itself one of the nodes. Moreover, the problem with liquidity is already fixed. After all, for the user, liquidity in the platform is most important in order to fill their orders. Additional functional as margin trading with the leverage, too, can be implemented.
If you want to open or get a free consultation on a decentralized, centralized or hybrid crypto exchange, contact us and we help you.