Decentralized exchange

A decentralized exchange (DEX) is a cryptocurrency exchange which operates in a decentralized way, i.e., without a central authority. Decentralized exchanges allow peer-to-peer trading of cryptocurrencies.[1]

Ledger login on Switcheo Exchange

Because users do not need to transfer their assets to the exchange, decentralized exchanges reduce the risk of theft from hacking of exchanges.[2][3] Decentralized exchanges can also prevent price manipulation or faked trading volume through wash trading, and are more anonymous than exchanges which implement know your customer requirements.

There are some signs that decentralized exchanges have been suffering from low trading volumes and market liquidity.[1] The 0x project, a protocol for building decentralized exchanges with interchangeable liquidity attempts to solve this issue.[4]

Drawbacks

Due to a lack of KYC process, and no way to revert a transaction, users are at a loss if they are ever hacked for their passwords or private keys.[5]

Degrees of Decentralization

A decentralized exchange can still have centralized components, whereby some control of the exchange is still in the hands of a central authority. A notable example being IDEX blocking New York State users from placing orders on the platform.[6]

In July 2018, decentralized exchange Bancor was reportedly hacked and suffered a loss of $13.5M in assets before freezing funds.[7] In a Tweet, Charlie Lee, the creator of Litecoin spoke out and claimed an exchange cannot be decentralized if it can lose or freeze customer funds.[8]

Operators of decentralized exchanges can face legal consequences from government regulators. One example is the founder of EtherDelta, who in November 2018 settled charges with the U.S. Securities and Exchange Commission over operating an unregistered securities exchange.[9]

Reference
  1. Russolillo, Steven; Jeong, Eun-Young (2018-07-16). "Cryptocurrency Exchanges Are Getting Hacked Because It's Easy". Wall Street Journal. ISSN 0099-9660. Retrieved 2018-09-11.
  2. Sandle, Tim (2018-09-09). "Big investment in cryptocurrency startup Altcoin.io". Digital Journal. Retrieved 2018-09-11.
  3. Castellanos, Sara (2018-03-06). "Alexis Ohanian's VC Firm Invests in Crypto Trading Platform". Wall Street Journal. ISSN 0099-9660. Retrieved 2018-09-11.
  4. "0x lets any app be the Craigslist of cryptocurrency". TechCrunch. Retrieved 2018-11-24.
  5. "Bloomberg - Record Crypto Heist Raises the Appeal of a New Type of Exchange". www.bloomberg.com. Retrieved 2018-11-17.
  6. @Aurora_dao (23 Oct 2018). "#IDEX will begin blocking new orders from users with New York State IP addresses on Thursday, October 25th (6pm UTC). Cancels and withdrawals will remain active" (Tweet) – via Twitter.
  7. Osborne, Charlie. "Another hack rocks cryptocurrency trading: Bancor loses $13.5 million". ZDNet. Retrieved 2018-12-13.
  8. "The crypto world's latest hack sees Bancor lose $23.5M". TechCrunch. Retrieved 2018-12-13.
  9. "SEC, EtherDelta founder settle charges over operating unregistered exchange". Reuters. Retrieved 2018-06-05.
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