Tag: decentralized exchanges

Categories
Cryptocurrencies

Decentralized Vs. Centralized Exchanges: Which One Should You Trust?

What comes to your mind when you hear the word cryptocurrency? 

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What comes to your mind when you hear the word cryptocurrency? 

What comes to your mind when you hear the word cryptocurrency? 

Probably it’s the distributed and consensus ledger technology that forms the basis of the whole crypto universe. 

As such, it would seem counter-intuitive if other solutions built around this ledger technology end up diluting its decentralized aspect. Yet, the ratio of centralized exchanges’ trading volume to that of decentralized exchanges suggests that traders prefer the former to the latter. 

Well, there are many halftones between the two concepts – decentralized and centralized – with an arguable belief that not everything is always black and white. Besides, if the power of decentralization was to transverse all aspects of our everyday life, wouldn’t it send us into disarray? So, the real question here should be, to what extent should an exchange be decentralized? 

Decentralized Exchanges Explained 

Much like cryptocurrencies, decentralized crypto exchanges (DEXs), seek to create a trustless environment where buyers and sellers can transact freely. Instead of using matching buy and sell orders in a central book, DEXs utilize smart contracts to link traders directly to each other, eliminating the need for a third-party. In this way, these types of exchanges don’t hold users’ assets or any other personal data. They only serve as a matching and routing layer for trade orders. 

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Generally, there are two types of decentralized crypto exchanges: currency-centric and currency-neutral. Currency-centric exchanges are tied down to one specific blockchain network escrowing its native currency, e.g., Ethereum, Waves, Tron, and any other blockchain that has smart contract capabilities. Currency-neutral exchanges, on the other hand, tend to be more versatile. This means that they can be built on various blockchain networks and are therefore not tied to one specific digital coin ecosystem. 

How Decentralized Exchanges Work

Regardless of their differences, all decentralized exchanges work pretty much the same way. A client brings their funds like ETH, which are stored in the exchange’s network in the form of proxy tokens, in this case, DEX-ETH. Ideally, these tokens serve as collateral for the actual coins stored by the exchange. 

To execute a trade, the client sends an order to sell their tokens in exchange for, say DEX-BTC tokens, which also represent the actual BTC owned by the other party. The smart contract then matches and processes the orders, after which the proxy tokens are exchanged between the two parties. The seller gets the DEX-BTC while the buyer receives the DEX-ETH tokens. After receiving tokens, both parties can convert them to the actual currency, ETH and BTC, using the same trading channel or a different one.

Advantages and disadvantages of Decentralized Exchanges 

Given their architecture, one of the biggest advantages that rises to the forefront is security. The exchanges don’t hold customers’ funds in a central reserve and are thus not vulnerable to hacks or theft. At the same time, decentralized exchanges don’t require a user’s personal information, which also goes a long way in improving security and anonymity in line with the purpose of crypto.

A DEX eliminates the need for a middleman between traders, helping reduce the trading fees. Additionally, traders who like keeping up with crypto market trends, you might consider using decentralized exchanges. This is especially true if you invest in an Initial Coin Offering (ICO). Often, ICOs find their way into DEXs prior to centralized exchanges. 

Despite their numerous advantages, decentralized exchanges have their shortcomings. To start with, they require a higher degree of technical know-how to use efficiently. They also lack essential trading features, which makes them intimidating to new crypto traders. 

Due to the small number of users on DEXs, they have a relatively low trading volume. This translates to limited liquidity in addition to difficulties in finding a matching order since there’s a limited number of traders on the platform.

Decentralized exchanges also suffer from slow transactions. The slow speed of transactions may not be a big deal to small-scale traders, but it can be detrimental to trading giants with high-volume transactions. 

Also, by their very nature, DEXs have no physical location or proof of existence. Therefore it would be difficult to launch a complaint should an issue arise. 

Centralized Exchanges Explained 

Unlike their counterparts, centralized exchanges, also known as CEXs, function similarly to traditional stock exchanges. Essentially, they act as a middle-party between crypto traders and, in exchange, collect a small fee on every successful trade. 

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These exchanges are structured in such a way that they own their users’ private keys (or wallets), meaning that all transactions have to be executed in the mechanisms laid out by the central authority. Their having access to users’ wallets is a double-edged sword.

First, in case of a lost password, a user can easily recover their funds by simply contacting the exchange’s support team. At the same time, centralized exchanges are prone to hacks and thefts since they store client funds in a centralized database. But even with this downside, CEXs continue to attract a higher number of users than decentralized exchanges. 

Such popularity can be attributed to the seamless fiat to cryptocurrency trades carried out on the centralized exchanges. As such, it is easier for a new crypto trader to enter the market. Moreover, centralized exchanges boast of useful trading features like the stop losses, margin trading, and lending, which are not available on decentralized exchanges. 

Thanks to their high number of users, centralized exchanges have higher liquidity than DEXs. The liquidity is further enhanced by the fact that most CEXs accept fiat currencies and can even be linked to debit cards or bank accounts. 

To Centralize or Not to Centralize? 

Currently, centralized exchanges control the lion’s share of the global cryptocurrency trading volume. Although they deserve it due to the convenience they offer, they have watered down the idea of decentralization in the blockchain and crypto industry. Perhaps as decentralized exchanges continue to grow, there will be a major shift to these platforms since they maintain users’ privacy and security, which is becoming increasingly important as more centralized exchanges fall victim to hacks. 

Categories
Crypto Guides

A Quick Introduction to Decentralized Autonomous Organization (DAO)

Introduction

Introduction

Introduction

The blockchain technology has been in the industry for quite a while. Cryptocurrencies were the first ones to experience the taste of blockchain technology. As years passed, many technologies were being prototyped using blockchain. Then came Decentralized Autonomous Organizations. Many blockchain geeks would already be aware of it, while the rest are still clueless about this concept though they’ve heard it. So, if you are still one of those who doesn’t understand DAO, then this article might help.

What is DAO?

The meaning of DAO lies in its name. DAO is an organization that is both decentralized and autonomous. Back then, it was only an idea but became practical with the assistance of blockchain.

As mentioned, DAOs are organizations that run in a decentralized and autonomous fashion. In other words, they operate without a centralized party that makes decisions. In fact, all the growth and profit are managed without any central authority. When it implemented via blockchain technology, they are bound to follow programmatic rules that are granted through consensus.

DAOs can, in fact, be related to mainstream companies, as both have predefined goals. However, the goals of mainstream companies can be altered and may not be enforced. But in the case of DAOs, the goals are digitally enforced, and hence no alteration is possible.

Let’s consider an example illustrated by Mike Hearn to visualize the concept of DAO. He objectified DAO to a driverless car that acts like a taxi. It charges the passengers as a rental. After the journey, the profits are used to fuel the car at the gas station. In the whole process, the car does not require any human effort to figure out what to do, as everything is programmed initially.

Key Features of DAO

The first feature is obviously the autonomous nature of DAO. This means that any outside forces cannot corrupt a deployed function. In addition, their open-source nature makes it transparent. This eliminates the doubt for a trusted third party. There are tokens of all transactions, which are used for rewarding. With the non-hierarchical structure of DAO, all the funding takes place only during development and is distributed equally.

The Reason of Existence

Apart from a predefined goal, DAOs contrast with other organizations. In the present world, every organization out there is centralized. So, the only reason for the existence of DAOs is to take advantage of a highly efficient, autonomous, and decentralized system of governance. If organizations work like the DAOs, then there would be no time wastage and effort from an intermediary to control the organization. Instead, all the work would be done by itself.

The Advantage Over Traditional Governance

Governance simply refers to the interaction between various entities based on specific rules and norms and on how they are regulated and structured. Every governance in a company follows a top-down approach. In such an approach, there arises issues and dilemmas. For example, an agent can make a decision with their own choice as a result would not affect them.

If the decision turns out to be risky for business and expensive, the one to suffer would be the principal (a higher position), not the agent from a lower position. But, with DAOs, the costs, as well as the principal-agent dilemma, would be reduced because DAOs utilize smart contracts and blockchain technology in its working.

Categories
Cryptocurrencies

What is the ZRX Token?

Cryptocurrencies have stirred the financial space in a way that more and more people want to jump on this economic bandwagon. As the newest asset class, cryptos are overtaking other securities in an unprecedented fashion. But this is where we have a problem. For people to join the crypto revolution, they have to go through centralized exchanges. These exchanges, however, come with their own set of issues.

Cryptocurrencies have stirred the financial space in a way that more and more people want to jump on this economic bandwagon. As the newest asset class, cryptos are overtaking other securities in an unprecedented fashion. But this is where we have a problem. For people to join the crypto revolution, they have to go through centralized exchanges. These exchanges, however, come with their own set of issues.

Cryptocurrencies have stirred the financial space in a way that more and more people want to jump on this economic bandwagon. As the newest asset class, cryptos are overtaking other securities in an unprecedented fashion. But this is where we have a problem. For people to join the crypto revolution, they have to go through centralized exchanges. These exchanges, however, come with their own set of issues.

Enter decentralized exchanges (DEXs). DEXs, in which traders transact directly with each other, are fast becoming popular. 0x is one of the most high-profile of these types of exchanges, and it allows users to trade ERC 20 tokens via its native token, ZRX. In this guide, we’ll dive deeper into the 0x project, how it works, and the ZRX token and how to get your hands on it.

What is 0x?

0x is an open protocol designed to facilitate the peer-to-peer exchange of Ethereum tokens on the Ethereum blockchain. 0x was formed by industry experts Will Warren and Amir Bandeali in 2016.

The two envisioned a future where all kinds of securities, including stocks, precious metals, etc. could be traded as tokens publicly on the blockchain. 0x is created to be different from both centralized and decentralized exchanges and thereby provide the best combination of both their features.

It also seeks to solve problems that arise from both types of exchanges. Let’s begin with the issues facing centralized exchanges.

☑️ Susceptibility to Hacks

Centralized exchanges will always be prone to hacking attacks. Mt. Gox, Bitfinex and Binance are only some of the examples of centralized exchanges that have been hacked for Bitcoins worth millions of dollars. 

☑️ Subject to Mismanagement

Centralized exchanges are regulated by people who are fallible and prone to human error. The example of Mt.Gox is an exchange whose fate was caused by mismanagement.

☑️ Volume problems

Centralized exchanges often have trouble dealing with a sudden increase in demand. For instance, a sudden surge in demand for Bitcoin in November 2017 caused some exchanges to temporarily halt processing transactions while others experienced downtimes.

☑️ Subject to Regulatory Whims

Centralized crypto exchanges are registered in countries. This means they must play by the rules that the government of that country wishes to enact.

0x’s Technology and How It solves these, plus DEXes’ Problems

Decentralized exchanges rely on smart contracts for trading of ERC tokens. However, the sheer proliferation of tokens on Ethereum’s blockchain presents the problem of confusion and scalability. At the time of writing, there are more than 200,000 token contracts on the blockchain.

0x’s whitepaper notes: “End users are exposed to smart contracts of varying quality and security with unique configuration processes and learning curves, all of which implement the same functionality.”

This has caused several problems for the network, including increasing transaction costs for the network. This means for crypto exchanges, transactions would be charged a specified amount of ether. Also, as the volume of orders increases, the costs of operating it increases as well.

Second, the numerous exchanges have led to a fragmented user base and with it, fragmented liquidity for the DEXs crypto market. 

0x’s technology attempts to solve this by combining two technologies – State channels and Automated Market Maker. State channels take transactions off the blockchain, therefore reducing transaction fees. Automated Market Maker (AMMs) are algorithms that conduct trades between two parties, while also acting as the opposite party in transactions.

0x relies on “relayers” to host the off-chain order book and connect buyers and sellers.

Having seen how the platform aims to improve the DEX model, let’s look at how it addresses the main issues faced by centralized exchanges:

  • It provides a more secure platform as there is no single point of failure, thanks to the Ethereum blockchain which is open-source, pubic and distributed 
  • It eliminates the possibility of a rogue or malicious exchange running away with people’s crypto funds
  • It eliminates the whims of governments or regulators  
  • It makes crypto trading an affordable endeavor for all types of traders
  • It makes it effortless to swap tokens on the blockchain by removing the high transaction fees associated with centralized as well as smart contract decentralized exchanges. It intends to do this by taking transactions outside of the blockchain

What is ZRX?

0x has its own Ethereum token, known as ZRX. The token is used to pay relayers for their services. However, 0x’s main intention for the token is to facilitate decentralized governance over the 0x protocol upgrade system. This means anyone who owns ZRX gets to have input – proportional to their holdings, into any upgrades the protocol may get over time.

How to Buy ZRX

The ZRX token is available on the majority of crypto exchanges, including Coinbase, Binance, Bittrex, Shapeshift, Poloniex, Changelly, KuCoin, Huobi, Coinswitch, Bitit, and Idex.

Being an Ethereum token, ZRX can be stored in an Ethereum wallet. Other options include MyEtherWallet, Exodus, Eidoo, and Ledger wallet.

There is a fixed supply of one billion ZRX. During its launch, 50% of the tokens were released to the public, with the 0x project retaining 15%, 15% going to the developer fund, 10% to the founding team, and 10% to the project’s advisors and early supporters.

The Problems With 0x’s Approach

0X is an ambitious project and one that could be the solution to both centralized exchanges and DEXes problems. However, some crypto experts assert that the ZRX token has no clearly defined purpose.

Also, the staking approach – in which the more ZRX you hold the more you can contribute to the project’s development, means that it can be hijacked by investors with large holdings – which does not keep up with the spirit of decentralization. 

Also, some experts contend that the business model is not sustainable. By having its platform open and free, the project might be foregoing revenue from trades and setting itself up for failure in the future.

Conclusion

The 0x project has its flaws, but the protocol is a promising proposition. It solves the challenges presented by centralized exchanges while improving the decentralized exchange model. Its flexibility, versatility and its free availability may very well catapult it to be the future of cryptocurrency exchanges. It’s going to be interesting to see how this project pans out in the future.