Decentralized Ethereum Exchange Platform Development Company
In the crypto community, decentralized exchanges are increasingly gaining traction. It’s a good alternative to the regular centralized cryptocurrency exchange, which could go against the cryptocurrency’s core ideology of decentralization. Given that Ethereum is one of the most widely used and scalable blockchains, a decentralized Ethereum exchange opens up the possibility of building genuinely decentralized and trustless crypto exchanges.
We’ll learn a lot about the decentralized Ethereum token exchange in particular, as well as bitcoin exchanges and decentralized cryptocurrency exchanges in general, in this post.
A Brief Introduction to Cryptocurrency & Crypto Exchanges
Cryptocurrency announced to the world the money does not need to be controlled. It has also shown that on a fully decentralized and digital ledger, a proper payment and transaction system of global reach will occur. All of this, however, was insufficient to establish cryptocurrency as a reliable mode of transaction, prompting the establishment of cryptocurrency exchanges.
The instability of bitcoin, which was once thought to be a curse for trades, has changed the way people think about exchanges. Since cryptocurrency exchange businesses profit from any sale, regardless of whether the broker profited or not, it places itself as a profitable crypto company.
The Bane of Centralization
The majority of these cryptocurrency exchanges, on the other hand, were under the administrator’s jurisdiction, implying that the entire exchange was centralized. The basic policy on which cryptocurrency was founded – the lack of centralized authority or a third-party aspect to maintain confidence – is explicitly contradicted by centralization. Hacks and the theft of cryptocurrency have also occurred on decentralized exchanges.
Enter decentralized exchanges
Decentralized cryptocurrency exchanges were developed to counteract the drawbacks of centralization. It adheres to one of Bitcoin’s basic founding principles, as outlined in Satoshi Nakamoto’s white paper. The decentralized cryptocurrency exchange abandons the trust-based paradigm entirely.
Despite the fact that it has been more than three years since the initial proliferation, the amount of trade posted on decentralized exchanges is less than 1% of the volume reported on centralized exchanges.
What is a decentralized exchange?
Although there isn’t a precise description for this question, an approximate answer can be given. A decentralized exchange is a protocol that allows users to trade assets without having any control of their funds. The exchange is absolutely untrustworthy and it does not have access to the money invested.
Smart contracts handle the confidence factor, making it entirely reliant on the blockchain and not on any third parties. The custody of funds is at the heart of decentralization. The term “decentralized” will be applied to exchange as long as the participants have ownership of the properties being traded.
Atomic swaps can be thought of as the precursors of the decentralized exchange. In 2013, the first full account atomic swap was released, and they can only run on a single blockchain. Ethereum-based decentralized exchanges have been slowly increasing in recent years, as Ethereum is one of the most widely deployed blockchains for smart contracts and many other applications.
The different types of decentralized exchanges on Ethereum:
There are about 50 different protocols that are being used by decentralized exchanges belonging to various blockchains. Another 100 more are in separate stages of development. To understand the different protocols and architecture, it is important to glossaries certain key terms.
- A market maker is the one who places an order or a limit order in the order book.
- A market taker is a user who takes the order placed by the market maker.
- Off-chain order books are limit orders placed by users and are in existence outside the blockchain.
- Conversely, on-chain order matching is the instant orders that are matched on the blockchain.
- The on-chain settlement is the exchange of tokens settled right within the blockchain.
Decentralized exchanges on Ethereum can be classified into the following categories:
- Off-Chain or 0x protocol where all the settlement and the order matching happens on the chain, but the order books stay off-chain.
- Fully on-chain protocol where everything including settlement, order-matching, and order books stay within the blockchain itself.
- Semi-centralized or hybrid exchanges have the settlement on-chain but the order-matching and order-books are off-chain.
- Liquidity pools facilitate on-chain settlements. The trades aren’t peer-to-peer but between traders and a liquidity pool.
The KYC conundrum:
The KYC/AML formalities have been created to safeguard the exchange from being used by people with malicious intent. This includes terrorists, illegal activities, and a lot of other places where the anonymity of cryptocurrency transactions could be exploited.
While on the surface, this might seem like a necessary activity for centralized exchanges, it has also led to a perspective of criticism. The introduction of the KYC/AML formalities compromises heavily on the privacy of user information. Therefore, any compromise on the security of the centralized exchange will result in private data and personal information about the traders getting into the hands of people with malicious intent.
This has resulted in creating a divide among the fans of decentralized cryptocurrency exchanges with one faction stating that it is important for the exchange to know its customers, and the other stating that it is a compromise on the identity, and it goes against the anonymity that cryptocurrency promises in the first place. The government of the United States mandates that all exchanges should collect KYC/AML information.
Centralized versus decentralized – the arm wrestling
When it comes to the market share, in almost every dimension, centralized cryptocurrency exchanges perform better than their decentralized counterparts.
The volume of trade is often taken as one of the parameters by which the market size of a cryptocurrency exchange is measured. However, there is one aspect that unfairly tilts the skills in favor of centralized exchanges – centralized exchanges can be faked by emulating bots trading within themselves. Therefore, the market volume cannot be taken at its face value. When it comes to decentralized exchanges, Brugu leads the market in terms of volume, handling over 28% of the total trades that happen on decentralized exchanges. It is closely followed by Bancor which holds about 21% of the total market value.
Alternatively, the market size of exchange can also be measured by the number of transactions, the number of active users, the site traffic, and the balance of smart contracts. Even in all of these parameters, Brugu leads the charts, making it the numero uno decentralized cryptocurrency exchange in almost every aspect.
Advantages of decentralized exchanges
A decentralized Ethereum exchange brings a big list of advantages that position it better than centralized exchanges.
- Security – This is the most significant benefit of decentralized exchanges over centralized exchanges. Customers’ assets are not held by custodians on decentralized exchanges, and customers have full discretion of the funds they have invested in the exchange. Instead of a centralized corporation or human interference, a smart contract or protocol manages trust in decentralized transactions. The litmus test for deciding whether or not an exchange is completely decentralized has been secured and its offshoots.
- Anonymity – Another benefit to open exchanges is the focus on privacy at the second stage. For centralized exchanges, KYC/AML formalities are needed. However, a large number of decentralized exchanges do not need KYC registration or sign-up. This means that users can exchange anonymously by using browser plug-ins or creating local wallets to link their cryptocurrency wallets. The majority of centralized exchanges have a lengthy and inconvenient sign-up process. Decentralized exchanges, on the other hand, do not need KYC/AML since smart contracts handle the majority of the “confidence,” making them completely anonymous.
- Legal sides – At best, the regulatory framework regulating decentralized cryptocurrency exchanges have been hazy. There have been occasions where businesses have been forced to take down their websites as a result of our trade. However, no one can deny that someone has the right to build a new decentralized exchange that needs to connect with a smart contract that already exists. Some exchanges, such as brugu, have geo-blocked the United States from accessing their website due to legal concerns.
- Transparency – Decentralized exchanges are highly open, and they only function according to the smart contract’s instructions. This almost eliminates the risk of human error, resulting in increased investor and trader trust.
Disadvantages of decentralized exchanges:
Decentralized markets offer more than just benefits. They have their own set of drawbacks as well.
- Only one blockchain may be used for decentralized exchanges. This means that some typical transfers, such as Ethereum-to-Bitcoin trading, are not possible on user-friendly decentralized exchanges.
- Decentralized exchanges are well-known for being difficult to use. Liquidity problems and order clashes have been recorded.
- There are a few decentralized markets that give shot ranking on occasion, but it is not a common feature.
Have you ever heard of an idea having a problem, and then a solution is applied to solve it, only to discover that it returns you to the problem you were trying to solve in the first place? Specifically, centralized blockchain exchanges fell under this group. It attempted to make cryptocurrencies more realistic, only to defeat decentralization in the meantime.
Anything said about the latest technology’s problems, foresee them to be resolved very quickly. With the COVID-19 crisis posing a threat to traditional economic elements, cryptocurrency has all the credibility to view itself as a reliable source of hedging and an alternative form of transaction.
With all of these factors, now is an excellent time to start a cryptocurrency exchange, and if you choose decentralized exchanges, the decentralized Ethereum token exchange is an excellent option. If you’re one of those budding developers, all you have to do is contact a firm that specializes in the development and customization of a decentralized Ethereum exchange.