Alternatives to Centralized Crypto-Exchanges 🏛 - umm, Let see 🤔
👉 Prone to failure and hacking as there is a single point of operation.
👉 As a centralized exchange is managed 24x7 by the team behind it, it requires a constant stream of income to operate which mostly comes from the trading fee it generates. This fee is increasing with time as the exchange operational cost increases.
👉 Users need to trust the exchange and are not in full control of their funds as the exchange hold users private keys 🔑which in the case of a breach in security are compromised and results in the permanent loss of their funds 💰without any errors from the user's end.🤷♂️
👉 Lack of privacy as they have all your KYC, Transactional and Trading data.
👉 They are constantly being targeted by Regulators which indirectly affect users.
👉 Trade, Deposit and Withdrawal restrictions.
👉 Inside Trading of assets.
The two that first comes to our mind when we think of alternatives are :
As the name indicates, Decentralized Exchanges are Decentralized which means they doesn't have a central authority or controller and operate as a Network of Nodes and thus doesn't have single point of failure or attack. Apart from this the users doesn't have to trust any central party or require to provide any personal information like they used to do in case of centralized exchanges and are in control of their private keys or so to say their funds.
When a user uses a decentralized exchange the user's computer becomes a part of the network itself and after the user have executed a trade and close the exchange application, he/she is completely disconnected from the network. Because of all these properties, decentralized exchanges are far more secure and private. Apart from this, the trading fee associated with most of the decentralized exchanges are slim as its operational cost are far less compared to centralized exchanges.
Trading in these kind of exchanges are managed by smart contract and also there are no restrictions on trading volume, deposit or withdrawal of funds.. But like every hero there are some problems currently associated with Decentralized exchanges which need to be fixed. Some of them are as follows:
Hard to use - Decentralized exchanges requires users to manage their private keys themself, because of thing these exchanges are not beginners friendly. Also most of the exchanges under this category have a poor UI making it difficult to use by the average user.
👉 Slow - As trading in here is managed by smart contracts, these are comparatively slow as of now, but we believe that to change in the near future.
👉 Lack of liquidity - Trade Execution time is far higher because of low liquidity in these exchanges.
👉 Lack of advanced functionalities like Margin Trading and Stop loss.
👉 Although it is true that users own their private key but the user is still required to deposit funds into the smart contract of the exchange. That is to say, funds leave the user's wallet and this is a risky step.
👉 Lack of support - as these exchanges operate in a decentralized manner there is no support like the centralized version. So in case of any misshapen, you are on your own😜
In order to solve some of the issues above Decentralized exchanges now a days are implementing Atomic Swaps.
As we have seen whether it may be a centralized or decentralized exchange a user is always restricted to trade only between specific pairs. Let me explain to you like this, suppose a user currently have Dogecoin and wants to buy Litecoin with it. Without Atomic swap, the user first has to SELL Dogecoin for BTC and then BUY LTC with BTC. That is to say, there is an involvement of an intermediary token or coin in this exchange process, in this case, the intermediary coin is BTC, which results in extra fees as you need to carry out 2 trades in this case instead of 1. This is also in the case of decentralized exchange like EtherDelta, IDEX where instead of BTC you have ETH as the intermediary coin.
As you can observe from the above animation, in Atomic swap a user can directly trade one crypto-currency for another without the use of any intermediary party, token, or exchange which makes it faster as extra steps are not involved in here. Apart from this, in atomic swap funds are transferred wallet to wallet and transactions are atomic that is to say if any of the users participating in the transaction fail to keep their end of the deal, funds are automatically refunded after a certain period of time. This time bound functionality is implemented using special type of smart contracts called Hash Timelock Contracts(HTLC), Below is a small animation of Atomic Swap working by Komodo.
Note: We won't dig in deep here as that would make this article very long and we will be discussing the working of Atomic Swap in another article.
Atomic Swap Mechanism Overview
This Atomic Swap Gif was created by us from Komodo's official Video
You may think that Atomic Swaps is the holy grail for exchanging one crypto to another but, it is not quite there yet. As of now, it suffers from limitations like it Atomic Swap can only happen between coin/token having the same has algorithm and works only on currencies based on Bitcoin Blockchain and will not work for exchanging tokens based on say, Ethereum Blockchain directly as both are fundamentally very different. For these issues, another approach known as ETOMIC Swaps is also under development.
This article was written by @pankajborah and @flamingirl.
If you liked reading this article, feel free to FOLLOW US, UPVOTE and RESTEEM! It's always appreciated =D. Thank you all for your support and see you soon for a new flamingirl's adventures!