Decentralized Exchanges - Glimpse into Future of Trading

Truly decentralized exchanges now have limited volume and users

by Ivan Penkov
25 May • 3.5 min
In Markets


Centralized exchanges run software on servers controlled by the operators. Exchanges such as Kraken, Bitstamp, and Coinbase are all centralized exchanges and they all have know your customer (KYC) and anti-money laundering (AML) programs. There are also other forms of centralized exchanges which conduct peer-to-peer (p2p) trades such as Localbitcoins and Hodl Hodl. They are considered to be p2p exchanges, or semi-decentralized.

Peer-to-peer exchanges (semi-decentralized) means that trades happen between users. Such exchanges do not hold traders’ funds and do not require KYC in most cases. Hodl Hodl is a perfect example of a p2p exchange because they do not have a wallet. Whereas Localbitcoins is not a good example because they store client funds in their wallet, which makes it more similar to Kraken or Bitstamp.

Decentralized exchanges (DEXs) do not hold client funds and operate without a central server. One of the most popular truly decentralized exchanges is Bisq. DEXs eliminate the single point of failure and it could remove the possibility of a government taxing your trades or even confiscating your funds.

Protocols for decentralized exchanges are designed to run DEXs (e.g. 0x) and in some cases decentralized apps (dApps). Those protocols allow for anyone to build their own decentralized exchange. They allow for a common interaction among one another, which in return provides a common pool of liquidity.


crypto exchanges graphic chart detail


What is happening with DEXs now?

At the moment, Hodl Hodl stands out among the semi-decentralized exchanges. Their service allows for generating a multisignature address where two keys are necessary to unlock the funds. One of the private keys is stored with Hodl Hodl and the other one is held by the user. Hackers have no incentive to hack the Hodl Hodl servers because they would not be able to unlock the funds from escrow without having both keys.

Currently, the truly decentralized exchanges have very limited volume and barely anyone is using them. DEXs are not user-friendly enough. The possibility of a system slowdown by the bloat from certain blockchains (token sales bloat, slow gas price adaptation) can make trading on a DEX quite challenging. On-chain transactions are slow on most blockchains. If off-chain technologies become widely spread, it would make trading on a DEX much faster. Atomic swaps would contribute greatly in that field.

Because the liquidity is still small, traders are discouraged from joining a DEX. Low liquidity results in difficulty to match orders. Wider adoption of DEXs and building of more DEX applications and protocols are needed if we want interoperability between blockchains.

The battle for the DEX market has already begun and many competing protocols are out in the open. Atomic swaps pave the way for trustless on-chain and off-chain exchanges in a multi-coin future where everything would happen seamlessly between blockchains.

Some of the popular DEXs (some still to be released) are:
Bancor Protocol
Hodl Hodl (Semi-decentralized)
Lykke (semi-decentralized)
Stellar Distributed Exchange
Streamity (semi-decentralized)

Some of the popular DEX protocols are: 0x (by 0x), Bancor, Counterparty, Komodo, OmiseGo (by Omise), OpenRelay, Lendroid, Swap Protocol (by AirSwap)