This guide to decentralized exchanges explains what is decentralized exchanges and features a comparison of popular DEXs in the cryptocurrency market today.
As of now, the vast majority of cryptocurrency exchanges are still very centralized. Orders, deposits, withdrawals and transactions are all routed in a centralized or closed system. Big exchanges like Binance or Okex save/route all orders within their own servers – and thus they are known as centralized exchanges. However, many cryptocurrency analysts believe that DEX (decentralized exchanges) will be the leading form of cryptocurrency exchanges when their technology and capabilities are on par with their centralized counterparts. After all, the appeal of cryptocurrencies is the promise of ‘decentralization’. Therefore, having good DEX with good liquidity is important for the future of cryptocurrencies.
What is a Decentralized Exchange (DEX)?
Decentralized exchange is an open-source trading platform that operates on the blockchain where no single entity controls the flow of data. It is the direct opposite of centralized cryptocurrency exchanges like Coinbase, Kraken or Binance which is controlled by companies and managed by centralized servers. DEXs do not rely on any entity to hold the customers’ funds. All trading transactions supposedly occur directly between users in a Peer-to-Peer (P2P) network through an automated, ‘trustless’ system. DEXs eliminates the following risks apparent in centralized exchanges:
- Server Downtime
- High Possibility of Market Manipulation
- Loss of Customer Funds
- Bankruptcy of Exchange
Many in the cryptocurrency space have experienced the above issues when dealing with centralized exchanges. DEXs are conceived to alleviate these issues and hopefully provide a viable alternative to centralized exchanges. Here are the differences in a nutshell:
The most common DEX typically rely on a single blockchain platform. For example, you can trade ERC-20 tokens (tokens built on the Ethereum blockchain) against Ether (ETH) on DEXs that are built on Ethereum blockchain, but you won’t be able to trade them against NEP-5 tokens (tokens built on the NEO blockchain ). There are solutions to this problem, i.e. by creating proxy tokens (a digital asset that represents a specific cryptocurrency on different blockchain platforms) or by creating a decentralized multi-signature escrow system. There are also other cross-chain solutions that are being developed.
Advantages of DEX
There are several advantages of DEX:
Trustlessness: The biggest advantage of a DEX over centralized exchange is its ‘trustless’ nature. In a centralized system, trust is required for a fully-functioning system. There are multiple risks associated with a centralized system that can compromise the entire system. As for DEXs, you are not required to ‘trust’ the company behind the DEX or users of the platform since all transactions occur in a transparent and automated system.
Low Fees: Trading fees on DEX are significantly lower as compared to centralized exchanges; some DEXs are even free. The only fees that users bear is the cost of sending transactions over the blockchain (e.g. Gas fees on the Ethereum Blockchain). However, it must be stated that there are times when network is congested, and fees are temporarily inflated.
Secure: Another big advantage of DEX is the fact that nodes (computers connected to the blockchain network) are distributed globally, thereby reducing the risks of server downtime as well as the possibility of hacking. But of course, a DEX must be popular in the first place to achieve an effective level of decentralization; the more nodes there are the more decentralized and beneficial the network will be.
Privacy: DEX provide privacy features that are increasingly rare to find in centralized exchange. Unlike centralized exchanges that require cumbersome KYC procedures, trading on DEXs does not require you to provide your personal data or information. Embracing privacy and anonymity doesn’t mean you’re a criminal; it just simply means that you’re redeeming your natural rights to have absolute control over your privacy.
Government-Resistant: No governments can shut down or impose any regulations towards DEXs, since they are not legal entities operating in a specific jurisdiction. DEXs are open source codes operating on a decentralized network, making it extremely hard for any government to try and control it.
Disadvantages of DEX
As much as DEXs sound awesome, we must also be aware of some issues and challenges that need to addressed before DEXs can eventually replace centralized exchanges.
Poor User Experience: The biggest issue with DEX is the fact that most of them aren’t user-friendly enough. Most new cryptocurrency traders find it hard and complex to use DEXs, preferring instead to use centralized exchanges which is much easier to navigate. It is hard for DEX to gain wider adoption when most of them are not super friendly to new traders. In addition, there are prior things that need to be understood before trading on DEXs, such as operating one’s own personal cryptocurrency wallet which is already complex for the average person to grasp.
Slow: Another important disadvantage of DEX is can process transactions relatively slower than centralized exchanges. Large centralized exchanges like Binance can execute trades much faster since they utilize centralized servers. DEX require thousands of different computers to sync with each other and this put them at disadvantage in terms of speed because centralized servers can process and execute orders faster. It has been widely known that blockchains are much more inefficient in processing transactions due to scalability issues.
Lack of Liquidity: Liquidity is a huge issue for DEXs. A high degree of liquidity is vital for any exchange or marketplace to function effectively and efficiently. Unfortunately, DEXs attracts much lower liquidity as compared to centralized exchanges since many find it complex to trade on DEXs. High liquidity would only come with greater platform usage.
No Margin Trading Facility: Margin trading has gained in popularity for traders to speculate and hedge their investments. Only centralized exchanges – such as Bitfinex, Kraken, Poloniex etc. – offer this facility at the moment.
(See also: Guide on Identifying Scam Coins)
Analysis of 7 Major DEX
Let’s take a look at 7 popular decentralized exchanges and compare their attributes based on a number of features:
IDEX is an Ethereum-based decentralized exchange for trading Ether (ETH) and ERC-20 tokens. IDEX is a popular DEX for newly-traded ICO tokens to be traded on before they reach a centralized exchange. IDEX is relatively fast and considered more user-friendly compared to other DEXs. Just like Etheredelta, IDEX leverages on smart contracts for users to manage their own private keys when trading in a secure, P2P network.
A unique feature of IDEX is that users will sign-off their transactions using keys while IDEX will broadcast the transaction to the Ethereum blockchain (IDEX will also be an Ethereum node). This provides the efficiency of a centralized exchange without compromising security and user control.
Hardware wallets (Nano Ledger) and software wallets (Metamask, MEW) can be easily integrated with IDEX. In fact, you can create your own ETH-based wallet on IDEX. IDEX has its own native tokens called AURA, which runs on a Proof-of-Stake model that allow stakers to earn a share of fees generated by IDEX and future Aurora products. Aurora is the company behind IDEX.
Here’s a summary of IDEX’s attributes:
EtherDelta was once the most popular decentralized exchange but lost its popularity after it was sold to new owners who introduced questionable policies and decisions. ForkDelta was then born from a fork of EtherDelta. Although it’s trading volume is limited, it still remains one of the go-to DEXs for ERC-20 token trading. Though IDEX uses a hybrid-decentralization model that requires its nodes to broadcast transactions, Forkdelta is fully decentralized since all transactions goes through the blockchain. Projects do not need get approval from the admins to manually approve token listing submission. All ERC-20 tokens can be traded automatically if there are buyers and sellers.
The user interface for ForkDelta can be complex and intimidating for the average users. In terms of wallet integration, Metamask and MEW is the easiest wallet to be integrated into ForkDelta. As for integrations with other wallets such as hardware wallets, it is unfortunately not as user-friendly as the other DEXs.
Here’s a summary of ForkDelta’s attributes:
3. Waves DEX
Waves DEX is an extension of the Waves ecosystem, which features its own blockchain and a native coin called WAVES. It is regarded as the ‘fastest DEX’ since it is built on the Waves platform, which is capable of processing over 440 Transactions Per Second (TPS). This capabilities dwarf the likes of Ethereum blockchain (7 TPS) and even Bitcoin’s blockchain (15 TPS). Waves DEX utilizes a hybrid decentralized structure since it leverages on a centralized order-matching service.
A unique feature of Waves DEX is that it supports trading of coins outside its blockchain (such as BTC & ETH), unlike previous DEXs that only supports coins created on their own native blockchain. Another unique feature is that transactions on the Waves Dex – as with Waves blockchain – is much faster than other public blockchains or DEXs. If that isn’t enough, you can trade a cryptocurrency asset built on the network to represent another cryptocurrency (BTC, ETH, LTC, Zcash, Dash, BCH, and Monero) or even fiat.
Waves DEX also feature a mobile application and in-built wallets (since the DEX is built on its native blockchain) to facilitate convenience for users. Waves DEX is one of those DEXs that possess a great amount of functionality and features, and will be one to look out for. Here’s a summary of Waves DEX’s attributes:
OpenLedger is a decentralized trading platform that is built on Bitshares graphene technology, which is capable of theoretical speeds of up to 100,000 TPS. This allows OpenLedger’s DEX to scale with more transactions. OpenLedger also features a couple of native stablecoins on the platform called bitUSD and bitCNY.
A unique feature of OpenLedger is that the DEX allows for trading of both cryptocurrency and fiat funds. Open Ledger features an in-built wallet in their DEX, which facilitates convenience for users.
In terms of wallet integration with external wallets, OpenLedger scores low on that since users cannot sync their software wallets (such as Metamask) to OpenLedger. Users must create an account through OpenLedger and pick either of two options: by bin-file or by normal account name/password. However, the process is quick with no need for KYC procedures.
Here’s a summary of Open Ledger’s attributes:
CryptoBridge is a decentralized exchange also built on the Bitshares network and leverages on Graphene technology, enabling high transaction throughputs and scalability. Unlike OpenLedger which runs on a hybrid decentralization model, CryptoBridge runs on a federated distributed system of gateways that runs on a Delegated-Proof-of-Stake consensus mechanism.. The system is powered by CryptoBridge’s native coin called BridgeCoin (BCO), which incentivizes participants to stake their coins for a share in the profits generated through the DEX.
A unique aspect of CryptoBridge is that it operates using a blockchain-based order book. This means that all forms of transactions – deposit, withdrawals, order matching – are stored on the blockchain. This ensures that CryptoBridge reaps all the advantages of a truly decentralized system. Additionally, CryptoBridge offers one of the most comprehensive cryptocurrency trading pair options out of all the DEX, with over 166 trading pairs.
In terms of wallet integration, it is similar to OpenLedger where users are recommended to create their own wallets through the CryptoBridge platform. There’s no option of syncing software wallets like Metamask or MEW with the DEX.
Here’s a summary of CryptoBridge’s attributes:
Switcheo is perhaps similar to IDEX, but built on the NEO blockchain. The main goal of Switcheo is to facilitate the exchange of Neo-based (NEP-5) tokens. Since the NEO blockchain is capable of speeds up to 1,000 TPS, Switcheo leverages on that capability to provide an efficient and high-performance trading environment. Switcheo leverages on smart contracts to facilitate execution of trades within the peer-to-peer (P2P) network.
The ultimate goal of Switcheo is to be able to support cross-chain capabilities with other popular chains like Qtum (QRC20), ETH (ERC20) and even Stellar. You can find pretty much every NEP-5 token traaded on Switcheo. Switcheo is the go-to DEX for trading NEO or GAS against all kinds of NEP-5 tokens
In terms of wallet integration, it is relatively easy to sync one’s NEO wallet to Switcheo.
Here’s a summary of Switcheo’s attributes:
7. Stellar DEX (StellarTerm)
Stellar DEX is an open-source DEX built on top of Stellar blockchain. StellarTerm allows anyone to issue and move assets held by user accounts, with an in-built wallet that is integrated together with the DEX.
A unique feature of Stellar’s DEX is that it supports cross-payments capabilities of both cryptocurrency and fiat pairs. This offers users a flexible approach to easily swap currencies on an global scale.
In terms of wallet integrations, users can only create a native wallet through the Stellar platform or with a hardware wallet (Ledger Nano).
Here’s a summary of StellarTerm’s attributes:
(You might also be interested in: Beginner’s Guide to ICO Investing: How to Participate in ICOs)
Beneficial Resources To Get You Started
If you’re starting your journey into the complex world of cryptocurrencies, here’s a list of useful resources and guides that will get you on your way:
- Crypto Guide 101: Choosing The Best Cryptocurrency Exchange
- Guide to Bittrex Exchange: How to Trade on Bittrex
- Guide to Binance Exchange: How to Open Binance Account and What You Should Know
- Guide to Etherdelta Exchange: How to Trade on Etherdelta
- Guide To Cryptocurrency Trading Basics: Introduction to Crypto Technical Analysis
- Cryptocurrency Trading: Understanding Cryptocurrency Trading Pairs & How it Works
- Crypto Trading Guide: 4 Common Pitfalls Every Crypto Trader Will Experience
- Guide to Cryptocurrency Wallets: Why Do You Need Wallets?
- Guide to Cryptocurrency Wallets: Opening a Bitcoin Wallet
- Guide to Cryptocurrency Wallets: Opening a MyEtherWallet (MEW)
Get our exclusive e-book which will guide you on the step-by-step process to get started with making money via Cryptocurrency investments!
You can also join our Facebook group at Master The Crypto: Advanced Cryptocurrency Knowledge to ask any questions regarding cryptos!