Every crypto investor shudder to the idea of investing in an exchange with controversial security measures. They know that if the worst possible security breach befalls the crypto exchange and hackers make their way, all their hard-earned coins will be wiped away!
The Blockchain technology, the brain behind Bitcoin and all Altcoins, is designed in such a way that it allows strangers to conduct a trustless transaction without involving outside intermediaries. This technology is the ultimate solution to transactions that often suffer outside influences from the government, scammers, and hackers.
Yet, despite all that, high profile hacks still happen, at least on centralized exchanges. And this came to light just recently when millions of dollars’ worth of coins was lost after Bithumb, Coincheck and Japan’s Zaif were hacked. Coincheck lost a whopping $500 million in XEM, while $60 million worth of user funds were wiped away from Zaif.
The frequency of hacks on exchanges has seemingly dented the image of cryptocurrencies whose emergence had been considered to be a revolution of some sort. Hackers and scammers effortlessly earned their way thanks to the absence of internal checks and proper management teams that did not know system risks.
The irony with all these, however, was the centralized exchange being at the center of decentralized cryptocurrencies. And so, hackers and scammers took over, running amok and stealing from those who had listed their coins for sale!
But there’s some source of relief, finally!
Christened the real 21st-century crypto exchange solution, decentralized cryptocurrency exchanges or DEX have been proposed as the real solution to rampant exchange hacks. They are not only Peer-to-Peer trading while granting traders an absolute control of their coins, but also combat the common inefficiencies of standard digital asset exchange platforms.
The four major roles of any crypto exchange are accepting deposits, order books, order matching, and trading assets or coins. But while doing all these, safety and security of its users is of incredible importance. For a while now, centralized exchanges have had to put up with inefficiencies that include delays in completing transactions and trust and security issues among other ills.
What exactly is a decentralized exchange?
These DEX platforms are highly effective in eliminating hacking attempts and fostering trustless transactions. Its most significant feature is the issue around the “custody” of the coins, whereby unlike a centralized exchange where coins would show up on your account yet they literally are in the exchange’s wallet, this one gives you total ownership of your assets.
It can either be a currency-centric exchange if it’s built on top of a single blockchain platform like Ethereum blockchain. Or, it can be currency-neutral when its structure is linked to various native cryptocurrencies. The difference between the two is that a currency-centric exchange is mainly meant for escrow purposes, unlike the former whose role is to allow trading of different assets on a P2P basis. Perfect examples of both are those that accept ERC20 assets for the former and the recent, favorite exchanges like Bisq, altcoin.io, and flyp.me for the latter.
Disputes That Decentralized Exchanges Could Solve
- They’ll remove risks eminent in centralized exchanges
Centralized exchanges aren’t all glamor, especially when you consider the risks that come with each transaction. Fraudsters thrive in there, knowing that any deal done is non-reversible, meaning when you are scammed, your funds will disappear for good. Also, the fact that transfers are hard to trace means even when there’s a hack, the funds can’t be located and the culprit apprehended.
The good news, however, is that these and a couple other problems are satisfactorily dealt with by decentralized exchanges. Within decentralized exchanges are systems of computers, some of whom function on on-chain, essentially through smart contracts.
Hackers can’t gain access into a P2P network, no matter what. And with the assets at your own personal or external wallet, you submit and confirm trades on your own while the exchange merely acts as the matching service. And here, the benefits are the confidence that your funds are secure and every transaction is automated.
- No third party holding customer’s funds
With centralized exchanges, there’s the IOU ((I Owe You) tokens) factor whereby, even when you’ve deposited funds and purchased the coins, what’s in there are mere proxy tokens. The real coins are in the wallet somewhere so that when you request them, the proxy tokens you see are converted and wired back to you.
This is the reason why when an attack is meted on such exchanges, the extent of the damage is disastrous. This, of course, is absent in decentralized exchanges where an automated process ensures that the transaction is between you and the P2P system. There’s no third party to monitor the system and accept your request.
Nodes that are part of the smart contract only speed up transactions that would have otherwise taken a while on the ordinary exchanges. A trade done on DEX platforms will then be open, transparent and free from hackers and scammers.
- Faster, cheaper transactions
The absence of a middleman in DEXs is a great feature, not just because the assets are undoubtedly safe from scammers, but also the speed at which a transaction is completed. Without a third-party authenticator, transactions are completed quickly. This gets even more exciting when the exchange’s nodes are made to allow terrific speeds.
Developing a Decentralized Cryptocurrency Exchange
As it is crystal clear, the best exchange would be a decentralized one. Having such a Decentralized Autonomous Organization would mean the safety of the shareholders’ assets would be guaranteed. With this shareholder-controlled system complete with all the aspects of the exchange, shareholders will also have absolute decision-making power.
However, it is possible to have a decentralized exchange of your own as well, provided it will consist of the trading and matching engine, wallets, UI wrapper, and admin system.
- The UI part of it can be a web client, mobile client, desktop application or basically anything.
- The trading engine should have the order book as well as the trading bot engine which is the other half of it. It is at this stage that the main features of blockchain technology are implemented.
- Then there are the cryptocurrency wallets, which also have to be decentralized.
- Achieving the liquidity aspect of it can be quite tricky unless you choose to go for the hybrid cryptocurrency exchange.
- Finally, there must be the admin system where you will monitor the number of registered traders, history of trades, transactions, the entire system and so forth.
It is possible to have one, although it isn’t a mean feat. As the BlockDX algorithm summary elucidates, the process isn’t for the mean of heart. Once done developing a decentralized exchange, lots of testing will help fine-tune it and ensure it’s up to the task.
The sheer ingenuity of the development community, especially in cryptocurrency exchange development services is best summed up by how much of help DEXs have been. From the entire architecture of the platforms, the essence of smart contracts and how secure they are to their massive implementation, the industry is at peace, at last!