Top 5 challenges of Decentralized Exchanges
The cryptocurrency market is on the path of constant evolution. From traditional exchanges to centralized and decentralized exchanges, the technology has evolved to make trading secure and more convenient. However, with all the development occurring in the trading space, we are yet to address the issues of present-day cryptocurrency exchanges. A centralized exchange conducts trade off-chain, on a separate private database. While this is commonly followed in the mainstream financial world, it creates different operational risks in cryptocurrency trade. The idea of decentralization theoretically offers an attractive alternative to overcome the problems of traditional and centralized exchanges. A decentralized exchange involves peer to peer cryptocurrency trade without an intermediary or third party. This eliminates the counterparty and hacking risk presented by the centralized exchanges. However, we have not been able to build a viable solution to overcome all the inefficiencies of the existing exchange system. A decentralized exchange offers a marketplace that matches the makers and takers, facilitating their transaction on a blockchain or a distributed ledger. The trade is conducted directly between the traders through an automated process enabled by smart contracts. This reduces the risk of market price manipulation and tampering of funds. That said, the exchange is not without issues. Traders still encounter several difficulties while trading on decentralized exchanges.
Shortcomings of decentralized exchanges
High latency and network costs
The purest form of a decentralized exchange is a fully decentralized exchange. These exchanges are completely decentralized in that they conduct every transaction and interaction between the orders, entirely on the chain. As a result, the transactions are expensive and slow. The different transactions on fully decentralized exchanges such as transferring cryptos, canceling orders, waiting for block confirmations all take longer time, ranging from a few extra minutes to hours. Apart from the challenges of validation time and cost, decentralized exchanges are also vulnerable to the issues of front running.
Low volume and liquidity
A major challenge encountered by decentralized exchanges is liquidity. Liquidity indicates the ease of buying or selling a particular asset. In the cryptocurrency market, high liquidity indicates a higher probability for trade and hence is always desirable. Low liquidity causes price slippage which forces the traders to depend on the expensive centralized exchanges for trade. Price slippage, caused due to the occurrence of a delay in between ordering and execution of the trade, can create great variation in the price. This can prove to be risky for the trader. As a result, the volume of trade in these exchanges remains considerably low in spite of the fact that decentralized exchanges are functionally better than their centralized counterparts. Their volume is found to be even less than 2% of total transactions conducted in a day.
Fiat currency exchange
Fiat currency exchange is not offered by most decentralized exchanges even today. Although cryptocurrency has become popular among the masses, a majority of the population do not have access to it. Many potential investors looking to invest in decentralized exchanges have to first exchange fiat currency at a centralized exchange to buy and sell cryptocurrencies. The need for conversion of fiat to digital currency such as BTC increases the fees and delays the transaction speed, affecting the efficiency of the exchange.
Cross chain transactions and atomic swaps
The concept of cross chain transactions in a decentralized exchange suffers from a major drawback of security. When two different blockchains are combined to conduct a transaction, the security of the resulting decentralized system will be on the level of the chain with the lowest security. This means decentralized transactions can be conducted only between chains with the same security level. Decentralized exchanges are yet to effectively develop and test atomic swaps that allow the efficient swapping of buyer and seller assets across chains, following a match in their preferences. This would help in bringing down transaction fees while increasing the speed to carry out the transaction.
The basic working of blockchain technology includes the grouping of transactions into blocks before processing them. This is carried out at an interval of 5 to 10 seconds in most blockchain protocols. The trouble of trade collision is created in cases where two similar orders are received within 5 to 10 seconds of each other. In such cases, both the transactions enter the same block and transaction fees is collected from both the users. However, only one transaction can be executed. The issue of trade collision can result in higher transaction fees with the increase in market size and frequency of occurrence.
Overcoming the decentralized challenges with BankDex
The success of a decentralized exchange depends on several factors such as the number of traders, scalability and a unique user experience that simplifies trade. BankDex is built on a core technology that rests on high-speed and high-performance servers allowing traders to perform lightning-fast trade of multiple cryptocurrencies. The underlying technology of BankDex ensures low latency with high throughput and a confirmation time that counts under a second. The transaction validations and persistence are carried out with a loose mesh topology of kernel nodes ensuring that the transactions are broadcasted at a significantly increased speed. This topology of the exchange helps in overcoming the dilemma of trade collisions as well. The BankDex decentralized exchange offers an interactive and easy to use interface that makes trading easy for the traders, irrespective of their experience in cryptocurrency trade. It is one of the first exchanges that enable effortless trade similar to a centralized exchange. This ensures higher liquidity capable of increasing the trade volume. BankDex is one of the few decentralized exchanges to support fiat currency. It supports over 50 top cryptocurrencies and has the ability to carry out the cross-chain transaction with many blockchain systems. The exchange also offers unlimited withdrawal of currencies. It also addresses the issues of high trading fees by offering services free of cost for the initial 90 days and thereafter at a nominal rate of 0.003 $. The exchange also accepts trading fees in equivalent SAM tokens. BankDex is designed to address all the shortcomings of existing cryptocurrency exchanges by providing a secure, scalable and fast decentralized exchange that performs flawless multicurrency trade.