With the proliferation and boom of cryptocurrencies, there has also been a need to have platforms where we can mobilize them. Although they have already shown us over time that centralized platforms will always have security breaches and hackers will always be there to find and exploit them.
The first transactions of Bitcoins worked through exchange companies, main channels to negotiate with cryptocurrencies and exchange them for fiat money or other cryptographic currencies.
To get an idea of the consequences of using centralized platforms we have Bitfinex and the case of the stolen $ 70 million in Bitcoin, the sudden closure of BTC-e or the famous Mt. Gox case in Japan.
What is a decentralized exchange?
Starting from another perspective, a decentralized exchange is a software through which the different blockchain interacts. There is no need for a third party to carry out the exchange because the operations are carried out between peers (P2P).
EtherDelta, ShapeShift, OpenLedger, Ox, Bitsquare, among others, are decentralized exchanges where users can negotiate directly with each other.
To get an idea is like an e-Mule or BitTorrent but in cryptocurrencies. That is, the contact and transfer is made between two computers connected through a decentralized network.
Can decentralized exchanges be viable?
This concept is attractive because it allows users to eliminate any risk linked to a centralized exchange, which can manipulate their customers’ money and manipulate market prices.
However, no technology is fault-proof. Decentralized exchanges have the following disadvantages:
- High costs for transactions.
- The transaction validation time (can last up to 10 hours in the Bitcoin block chains).
- They can become more complicated for new and inexperienced users.
- Negotiation models (loans, stop loss, take profit, etc.) are not yet fully implemented.
- Being little known, they have little trading volume compared to centralized exchanges, which makes liquidity when we want to sell a token more complicated since there is less demand than in a large volume centralized exchange.
- It is not possible to deposit or withdraw fiat money.
These platforms are still under development but they also have a huge growth potential which does not necessarily imply a decrease in the popularity of centralized services despite the fact that these are the norm in the traditional financial world and that go against the original purpose of the blockchain technology. We will have to see how they adapt to future regulations as it happened with e-Mule or BitTorrent, for example.
One possible alternative is Legolas Exchange, an exchange that runs on a hybrid model, incorporating a decentralized ledger within its proprietary centralized platform in an attempt to provide the inalterability, timing and transparency of the order book.