Problems in Decentralized Cryptocurrency Exchanges (DEX)
With almost everyone looking for the best practices and platforms to trade their Crypto assets, and the dreadful high-profile hacks lingering over the centralized exchanges available, the notion of decentralized exchanges gained traction in almost no time. Everyone in the Cryptosphere welcomed the idea of peer 2 peer, trustless and non-custodian decentralized exchanges with open arms.
Some of the reasons which led to the Decentralized Exchange boom as we see today are here:
- One in every 16 Bitcoins has been stolen.
- Regular and costly hacks from the centralized cryptocurrency exchanges like that of Mt. Gox and BitFinex.
- An approximate One-third of the total millennial population being invested in the cryptocurrencies – or as we call it – The Cryptosphere.
- The need to trust an intermediary or central party with their digital assets is contradictory to the very reason why people wanted to go to cryptocurrencies in the first place.
As the decentralized exchanges sprung up across the world in huge numbers, but the adoption of these DEXs has not been as expected. The numerous problems in decentralized cryptocurrency exchanges could be the reason behind this. People are still willing to risk their assets with the centralized exchanges who are prone to get hacked, looted or even running away with their funds. For all the DEX enthusiasts out there, analyzing the causes as to this behavior of people is of utmost importance, especially if you’re looking to make a decentralized cryptocurrency exchange.
In this article, we are going to discuss the problems in Decentralized Cryptocurrency Exchanges at the moment
Have a look:
The latency of on-chain Orderbook and order management
The present decentralized exchanges are known to have failed in generating significant volume due to inefficiencies associated to their designs which tends to create a considerably high friction cost on the market makers. This problem in decentralized cryptocurrency exchanges must be your top priority to solve if you are making a decentralized cryptocurrency exchange.
One of the biggest causes of this high friction costs is the on-chain Orderbook. This makes the market makers spend gas every time they have to post, modify or even cancel an order. Some would argue that these gas costs for the individual orders are too low for someone to notice. However, frequently modifying the orders as the market changes are when you realize the ridiculous gas costs.
Apart from making the market makers pay the insanely large amounts of gas costs unnecessarily, the concept of on-chain Orderbook results in transaction consuming huge network bandwidth and end up bloating the blockchain even when it’s not involved with any value transfer.The speed and complexity requirements of the sophisticated trading features call for an off-chain matching and on-chain settlement. Only then, the cryosphere could imagine the decentralized cryptocurrency exchanges to be capable of margin trading and P2P financing market over the blockchain.
Most of the decentralized cryptocurrency exchanges in the present day could conveniently be called a medicine that cures cancer, but kills the patient! Be it the centralized ones, or the decentralized cryptocurrency exchanges, it really makes no difference when it comes to being front-run by a third party. Never in history have people been able to get away so swiftly with market manipulation theft, essentially as they are today with these decentralized cryptocurrency exchanges. This,
With the present exchanges, the miners are able to front run the traders without any repercussions. This stems from the fact that miners are able to see all the transactions even before they are put into a block, and these miners are able to put their own transactions into the block before yours. To understand front-running properly, let’s have a look at the interesting case of Etherdelta.
As all the trades are being settled on-chain, miners have a front seat view to all these transactions. Even after the trader cancels an order that they set up, say a few days ago, the miner could still execute it is the counterparty on the other end. This results in you losing big time, while the miners cash-in from your cancel orders. This is perhaps one of the biggest problems in decentralized cryptocurrency exchanges at the moment. The integration of limit order books, however, could be the solution to this problem in the decentralized cryptocurrency exchange.
This is another one of the many big problems in decentralized exchanges. The process starts when a buyer places an order and moves out the funds at the very last moment associated with the particular order. The network and smart contract will eventually fail to complete those trades as the funds aren’t there to be used. But that doesn’t stop the miners from getting the gas cost associated with that transaction. Now, the miners can collude to place bogus orders and remove funds just as we discussed. This will get them the gas costs they want, and the takers will suffer the dent.
No cross-chain transactions possible
The little or no provision at all for the cross chain transactions to occur is also one of the big problems in decentralized exchanges which might be the reason for the slow adoption of them over the traditional centralized, custodian exchanges. It was only after September 2017 that the first cross-chain transaction came through without any third-party being involved.
The introduction of Atomic Swap is, however, a sigh of relief to the people in cryptosphere who yearn for a truly decentralized economy. You could solve one of the biggest problems in decentralized cryptocurrency exchanges with the atomic swap.
Low liquidity and transaction volumes
Despite cryptocurrencies having a market cap of more than $300bn at the moment, the cryptocurrencies listed on the decentralized exchanges show a very low liquidity. Part of the reason for this could be the inconvenience that is involved with these decentralized exchanges. Anyway, continuous improvement will help the Crypto community get rid of these crucial problems in decentralized exchanges at the moment.
Want to make a Decentralized Cryptocurrency Exchange?
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