Decentralized Cryptocurrency Exchange: A Comprehensive Review
Numerous attacks over the presently popular Centralized exchanges have triggered a huge number of their Decentralized counterparts being introduced in different parts around the world.
The decentralized exchanges are meant to empower the users, giving them the ability to rest assured of the security regarding their tokens since the decentralized exchanges do not call for them to send their tokens or funds to a company or centralized server which can run off with it or get hacked.
Now, it is only fair to think of these features as something that sets them apart if you were to look at one of them individually. However, an in-depth analysis made says otherwise. More secure and not trusting any centralized body with your tokens is somewhat a stock-standard expectation and doesn’t set any of these DEXs apart. The need of the hour is for these exchanges to manage orders and trades in a more efficient and robust manner than ever. In this article, we will discuss all the popular Decentralized Exchanges around the world and what they have to offer.
Here, we aim to discuss the various Decentralized Exchanges that have shown the potential to make traders abandon the Centralized exchanges. Let’s start:
One of the first ethereum based decentralized exchanges. A unified smart contract is employed to handle all the funds at Etherdelta. This asks for the users to send their tokens into the smart contract address on the ethereum network when they want to trade them. Users around the world find this cool, partly because of the anonymity that’s maintained, and because they’re not trusting any centralized server or company with their assets.
Etherdelta tries to keep the trading on-chain to the largest extent possible. Now, to resolve the slow mining speed of Ethereum blocks to be suitable for high-frequency trading, etherdelta uses a semi-centralized service for an off-chain order book. Etherdelta only supports resting orders, which makes people feel it different than a normal exchange. No automatic matching of orders is there. How are these exchanges different? In a traditional exchange like that of Bittrex or Poloniex, the users set up a sell order saying, they want to sell X number of tokens which is then matched with the buyer once the price you wanted to sell at is reached using an automatic trading engine.
That’s not how DEXs work at the moment. Everything is somewhat manual. Unless the sell order put by you is picked up by a buyer at the other end and prompts to buy it, nothing is gonna happen. The same goes for a buy order too. This is one of the most fundamental things which needs to be considered while you figure out how to make a decentralized cryptocurrency exchange.
The Ox protocol uses an off-chain relayer system to matchmakers and takers with buyers and sellers respectively for filling their orders. All the settlement is done on-chain which they call a hybrid approach. Unlike etherdelta which has their own order book relayer system, Ox allows to anyone to a spin up a relayer and end up becoming a relayer themselves.
The relayers are paid transaction fees to match the buyers with sellers, and vice versa. This is somewhat similar to mining, as you’re getting paid for matching people who want to trade different tokens. The important part here to understand is that 0x is a protocol and not an exchange. This protocol can be used by companies to spin off their own DEX.
This is another interesting DEX project which is best known to solve the problems with Orderbook in the exchanges discussed above. It basically lets the users send one token in and get another token out in return for their anonymity being retained at the same time. The buyers are informed about the exchange rates before sending their assets across which is what makes it even more desirable.
Problems like that of The Relayer Exploitation and Maker Grief are taken care of as there are no relayers involved on the Kybernetwork. This leads to a low transaction fee as the users aren’t required to pay for anything other than the gas costs of sending assets into the smart contract of Kybernetwork. Reserves, instead of the order book are there at Kybernetwork which is something that people believe that sets them apart.
Here’s all you need to know about the Reserves at Kybernetwork:
- A reserve is nothing but a large store of tokens which can be liquidated easily.
- The administrators at the Kybernetwork are the ones who decide on who is allowed to be a reserved operator at Kybernetwork. There’s a KYC procedure with Kybernetwork in order to become a reserved operator.
- People contribute to these reserves set up by reserve operators and then become sellers over the network.
- The prices of tokens are set at the discretion of these reserve operators.
- The reserve operators the ones who possess complete control of monitoring the market and have to update the prices with time. This calls for them to be responsive because of the high volatility in the market.
- The aim here is to develop a competitive marketplace of these reserves which will compete to provide at the best price which will eventually bring down the price to a reasonable level, or even better than other exchanges.
The frustrating issues like that of Front-running are completely eradicated with this Decentralized exchange built on top of the Swap protocol. This is done by moving almost everything except for closing the deal off-chain with the essentially peer-to-peer protocol. This protocol has built-in off-chain indexes which aggregate the orders, be it on the buy or sell side, and goes on to match buyers to the sellers. While you are trying to figure out how to make the best-decentralized cryptocurrency exchange, be sure to devise a reliable process of order filling. As an example of Airswap, Orders are submitted off-chain with the peer to peer protocol to the indexer which is tasked to find the prospective sellers. Following this, the two parties come together to negotiate, again Off-chain, privately the price at which they’ll be willing to make the trade happen.
To make things easier, the Oracle Protocol is employed which aims at finding the reasonable price by looking across the network. This allows the users negotiating off-chain to consult the Oracle and finalize the trade at a price based on the recommendation by Oracle. This is then followed by the final execution of orders on-chain.
Now, the interesting thing to notice here will be to look at the inefficiencies and irregularities that they’re eradicating by making most of the things off-chain with the peer to peer protocol. This, in turn, reduces the gas-cost significantly because the only time something happens on-chain is when the order is sold.
This notion of off-chain negotiation and on-chain settlement will sure be the magnet to make traders abandon the traditionally centralized cryptocurrency exchanges as they can maintain their Privacy, anonymity, and ownership of their assets while still reaping the liquidity benefits that a high-volume CEX has to offer.
Formerly known as Bitsquare, it is a desktop software application that the users need to download. It runs on the tor network which makes it highly private and anonymous as you don’t need to have an account for it. It allows the users to trade fiat currencies with Bitcoin or even exchange for other tokens in the cryptosphere. The integration of the fiat currencies, as well as the altcoins, is something that is must to include when you’re figuring out about how to make a decentralized cryptocurrency exchange. The Bisq project doesn’t carry out any identity verification of users but the arbitrators assigned to resolve any dispute related to any user will have to check the identity of the two parties involved in a dispute. Each and every piece of communication at Bisq is end-to-end encrypted over the Tor protocol.
The arbitrators are rated by the people who they helped resolve their disputes. These arbitrators have to buy-in for this role with collateral which prevents them to take away the user’s money. And if any such cases, the collateral money of the arbitrator in the case can be used to repay the users.
It is an Ethereum-based Decentralized exchange featuring over 200 cryptocurrencies along with Ethereum and ERC20 tokens. A smart contract is employed to manage the private keys, and nurture a secure P2P environment which is something you should put some thought into when you are planning on how to make a decentralized cryptocurrency exchange.
Idex uses its smart contracts for managing all the transactions which allow them to update the order book in real time and allowing transactions in a frictionless manner. This makes IDEX secure and P2P as a Dex supposed to be along with the user experience that a CEX has to offer.
As the funds are managed and stored in the smart contract of IDEX, the user’s assets are safe and sound. The trading at IDEX is continuous without any effect of the slow mining speed on Ethereum.
IDEX is capable of filling multiple orders at a time. Moreover, the user can cancel orders without having to pay the gas costs as with Etherdelta.
It would be really interesting to see how long does it take for these DEXs to attract traders.
Planning to make one yourself?
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