Decentralized Exchanges — Opportunity, Challenges, and Solutions
We are living in a world that is dynamically changing. Each and everything is changing drastically. Changes are mostly taking place in the technologies. And these technologies can be used for facilitating businesses and other operations.
The concept of blockchain is nothing new. Currently, another term known as “Decentralized Exchange” has been buzzing around. In this article, we will cover everything about Decentralized Exchanged, its opportunity, challenges, and optimum solutions.
Decentralized Exchange (DEX)
A Decentralized Exchange is a platform that allows people to opt for crypto exchange. The platform promises cryptocurrency trade’s correct decentralization. To enable this, DEX lets its counterparts trade directly with one another. Moreover, the users do not need to transfer their asset’s custody to the exchange. It minimizes the custody risk of assets.
It is made in such a way that there is no requirement of the central authority for facilitating trade. Decentralized Exchanges also promise a reduced risk of hacking, lower trading fees, and no involvement of an intermediary.
The opportunities offered by DEXs:
If you are an operator of a cryptocurrency exchange platform, you will have to understand the concept of DEXs correctly. There exists no centralized authority. It does not matter whether a DEX is made from scratch or is a white label cryptocurrency exchange software; there exists no central point to fail.
To ensure this, decentralized Exchanges are made for operating in a non-custodial fashion. The users are handed over with the private keys’ full control. Such a unique design brings multiple advantages not only to the exchange user but to the operator as well.
Opportunities for DEX users:
Now, DEX users enjoy some opportunities. They are as follows:
- The transactional fees are lower.
- It is resistant to hacking.
- The downtime is lower.
Opportunities for DEX operators:
Also, DEX operators get several advantages. The opportunities are given below:
- The pre-programmed smart contracts manage all of the operations. This reduces the operation cost.
- No operations or trade of a decentralized exchange can be censored by any regulatory body or government.
Ways to operate DEX:
There are two popular ways of operating a Decentralized Exchange. They are as follows:
- AMM-based DEX: There is an existence of liquidity issues with order book-based decentralized solution. At this point, AMM plays the most crucial role. It pools in the users’ tokens by incentivizing them to make sure that there will be liquidity even for the illiquid market.
- Order books-based DEX: Decentralized Exchanges make sure that the users do not need to compromise their assets’ custody. For achieving this, smart contracts are used to execute the orders. But the software of cryptocurrency exchange for order books-based Decentralized Exchanges can be made for operating in an off-chain model or on-chain model.
The former method required all of the nodes to record the order forever. As a result, they became slow. Therefore, the former method is also considered to be a little impractical. But compared to this, the off-chain order book is quicker because they make use of intermediaries offered by decentralized development services, called relayers, for managing the off-chain order books.
Challenges faced by Decentralized Exchanges:
At this moment, Decentralized Exchanges face problems in stabilizing the prices of the asset. It means that the trader may end up paying more or less than the token’s actual market price. Problems tend to arise for dApps development as well. Some of the challenges are as follows:
Decentralized Exchange user challenges:
The Decentralized Exchange challenges face by users are given below:
- Currently, Decentralized Exchanges are incapable of providing support to the wide range of crypto because of the lack of interoperability and liquidity.
- Decentralized Exchanges lack intuitiveness. So, they are suitable more for the traders who already have spent some time in the cryptocurrency space.
Decentralized Exchange operator challenges:
The Decentralized Exchange challenges faced by operators are given below:
- Decentralized Exchanges with on-chain order books will be having tons of data transactions being recorded. Several leading DEXs are built on Ethereum. As the number of transactions increases, they are likely to clog the Ethereum network and impact negatively on the Decentralized Exchange’s efficiency.
- Because of the too much transaction load, the Decentralized Exchanges suffer from long order matching time. And being an automated process, no human can do anything to boost the speed.
- Because of trade collisions, it often attracts high transaction fees.
- Fiat is not usually supported by DEXs.
Ethereum blockchain limits transaction fees and order processing speed. So, it is good to look for alternative blockchain solutions, which can attract DeFi users by facilitating decentralized app development faster. Also, make sure that the alternatives support interoperability between the blockchains for creating an improved liquid market.
In this article, we have successfully covered everything about DEXs. It offers several opportunities for the operators and users. But there exist some challenges as well which must not be overlooked. And to overcome this solution, you may need to look for some better alternatives to the Ethereum network.