HashTalk with Sankalp

🔥 Future is not bleak! Enabling the rise of Decentralized Exchanges

Originally published at https://hashtalk.substack.com.

NOT SO FUN FACT: Top 5 Bitcoin wallets control more than 20% of BTC’s circulating supply all belonging to centralized exchanges. What if they lose access to their private keys?

Answer, the users will lose their crypto assets, just like the users of QuadrigaCX who lost $140 million after the CEO died and the private keys to QuadrigaCX’s cold-wallet got lost forever. Upbit is the recent most casualty. We wont go into details of that here. Though many exchanges now require two or more private keys to approve the movement of funds, it is still centralized. To put it in perspective, last year exchanges got $800 million of crypto assets stolen.

Decentralized Exchanges have upped their game considerably in the last 12 months, more so recently with a lot of innovation around corresponding products (lending, derivatives, options etc) and liquidity solutions. But are we there yet? . What I love about a decentralized exchange is the fact that everyone is in control of their own funds which enables peer-to-peer trading reducing the risk of Single Point of Failure. Dramatically reducing the risk of theft from hacking of exchanges. Each one to its own. Don’t be fooled though, many are not truly decentralized and at times there is nothing to back up the cause.

Second aspect of a Decentralized exchange is transparency. Since all the orders in a Decentralized Exchange is matched and executed directly between peer-to-peer, it reduces the risk of fake trading volume while making the process more transparent. Though Decentralized Exchanges are a promising idea, they also have flaws. Since, decentralized exchanges put all of the transactions/wallet financials records public, it’s something that some users may not like owing to multiple news’ of data breaches, user behaviour tracking and identity theft.

So, what I feel is first, we need to have a modified version of a decentralized exchange with privacy at its heart to make it more safe for the users. Second, since decentralized exchanges are struggling with availability and liquidity, an instant swap functionality with atleast 70% of the cryptocurrencies will provide much more needed liquidity. If we are able to build a Decentralized Exchange along the same lines with a privacy strong blockchain such as ZCash at its boilerplate level, we will be able to view a promising future for Decentralized Exchanges. With which Vitalik Buterin also agrees:

“If I was doing anything seriously privacy-demanding, I’d probably go for Zcash first”.- Vitalik Buterin

Sure, the adoption to Decentralized Exchanges will increase but we do need to sort out these two pain points of users.

Advancements in Decentralized Exchanges

  • 0x Protocol for Ethereum DEXs: Much like rest of the world, we know that 0x protocol has many advantages over peer-to-peer exchange of ERC20 tokens. And the team at 0x also aims to resolve one more big issue with exchanges and that is of interoperability.

  • Eliminating Front-Running completely: Front-Running is one those issues that really pisses off traders to the brink. But, they cannot do anything about it. Many companies like AirSwap & ShapeShift are already claiming towards eradicating front-running but are unable to do so. The most obvious solution to this issue comes as concealing the “transaction” amount of the orders. But again, it failed since bad players in the trading system found a way to exploit it also. The next solution which is being touted as the better solution is K-Anonymity, in which superficial and virtual data points (transaction details in this case) are added with the data point that you want to conceal (the transaction details of an user in this case) such that it is nearly impossible for the bad actors to front-run that buy or sell order. While still managing to get it through with the smart contracts.

But, there’s a long way to go. For example, in the last 7 days, DEXs had 108 Million dollars in volume in comparison to centralized exchanges more than 80 Billion dollars 24-hour volume.

Some Charts for Decentralized Exchanges


The data above shows that even after 2 years and millions of dollars in funding, decentralized exchange protocols are still fighting to overtake CEXs and offer the same level of functionality, liquidity, and service. Decentralized Protocol projects such as 0x (ZRX) and Loopring (LRC) have been working hard. Decentralization is not the value proposition and projects already understand it. You can’t sell inefficient products in the name of idealist values, no one cares.

Disclaimer: None of the content in this newsletter is meant to be financial advice. Please do your own due diligence before taking any action related to content within this article.