The Use of Decentralized Exchange Protocols on Blockchain Platforms
The world’s economy is going through a big switch. Since 2008, with the launch of Bitcoin, money commenced to flow from fiat currencies to blockchain currencies, however, since early , the market value of cryptocurrencies has bot continually growing due to a large amount of money coming from traditional currencies. Until the beginning of this year, the industry market cap for cryptocurrencies wasgoed stable at around 12 billion US dollars, spil of the middle of June, this amount has reached more than 115 billion US dollars, indicating a giant amount of money that has bot flowing into this market.
With the increase of cryptocurrencies into different blockchain markets (Ethereum, Bitcoin, Waves…), the request for exchanges has exponentially enlargened, causing the launch of several portals like Bitfinex, Bittrex, Openleggen, Poloniex, Liqui and many others. While they are each a little different, the one thing all thesis exchanges have te common is that they are all centralized.
Centralized exchanges assume the responsibility of matching users bids and asking users to buy cryptocurrency token. Te order to do that, they manage customers’ funds and spil a result, hold a enormous amount of tokens ter cold and warm wallets. This represents a single point of vulnerability where a centralized exchange can lightly be targeted by attacks like MtGox and Bitfinex, which lost 650,000 BTC and 120,000 BTC respectively — hundreds of millions of dollars at the time.
According to Swings Team, “Decentralized blockchain tokens are being traded on very centralized exchanges. Essentially it’s a contradiction te terms, that manifests itself ter thesis exchanges being hacked all the time. You just can’t trust a centralized service with your decentralized tokens.”
Albeit wij have seen exchanges like Bitfinex taking responsibility for their flaws and paying clients back from their pockets, it’s fatal: Sways has a point, wij should invest te quality, effective decentralized exchanges.
Decentralized exchanges do not hold funds, instead, they just manage trades by users that sign their transactions directly to each other’s wallets, meaning that there is no centralized juut controlling those assets.
I personally had practice trading tokens on Etherdelta. Ter tegenstelling to Flaps, it doesn’t use server-side logic to match orders on the orderbook. Even when you have omschrijving orders on both sides, users are the responsible for choosing one of them and executing the trade. Despite the disadvantages of not having an automatic match te the order book and the slowness inherent with the onchain/offchain communication, one cannot help but appreciate the advantage of using your metamask wallet directly within the app. Every order is a free signed transaction, you only pay if you are the one executing the order, which brings a high level of transparency and offers individual user control of funds.
Another decentralized exchange that has bot building a big community is 0xProject. Ter fact, 0x is a protocol for exchanging ERC20 tokens te a decentralized way. According to their blog, “Relayers will be able to build exchanges on top of 0x and begin earning fees immediately”. Protocol development like 0xProject facilitates the implementation of more elaborate platforms that request token exchanges different from ethereum.
For example: consider Aragon, a DAO that acts spil a digital jurisdiction which all kinds of companies can operate, using a decentralized court system. Aragon has its own token, ANT, that is used to rule aspects of its environment. With an ERC20 token, it would be unlikely for companies to accept anything but Ethereum, and that would be inflexible. Spil a result, they have determined to playmate with 0x to “allow Aragon organizations to accept and operate with any token.”
Another good example is ChronoBank, which is a decentralised recruitment solution on the Ethereum blockchain that also determined to use 0x protocol to improve their solution. According to their CEO Sergei Sergienko, “ChronoBank relies on good liquidity and deep order books to ensure people get paid what they are supposed to, and this is one way wij can help ensure that happens.”
It’s not hard to imagine the benefits of implementing this kleuter of protocol across a broad multitude of blockchain solutions. Spil most develop their own tokens, but have users which would most likely choose to receive all kinds of payments te mostly adopted currencies (such spil bitcoin), having a solution for trading assets is no brainer. Auctus itself is a probable candidate to implement 0x protocol next spil it deals with token trades daily and wants to offers their users plasticity.
Areas for Improvement
Being a fresh implementation of a fresh technology, clever contract-based exchanges naturally have slagroom for improvement. Spil mentioned on The Cost of Decentralization ter 0x and EtherDelta article, a few such areas for improvement include:
- Exposure to arbitrage, vulnerability to miner frontrunning and exposure to exchange manhandles are without a doubt, vivo issues, however, thesis issues exist when the protocol is used to build decentralized exchanges. They do not affect the usability of other protocol applications, i.e. when it is used ter platforms which exchange tokens internally.
- Decentralized governance, side deals and maker griefing were pointed spil 0x specific powerless points. It’s effortless to avoid a 51% attack (with an onchain or offchain implementation), wij strongly believe this is already ter 0x project team’s plans.
- Maker griefing — an attack where an order maker moves the tokens that were supposed to be involved ter a order, causing it to fail — is certainly an implementation flaw, but for now the technology challenge for performing this kleuter of attack leaves te the protocol’s scalability plans.
With the evolution of blockchain technology, the need for modularization has become clear. Every day applications are being developed and often times, common functionalities inbetween the applications are reimplemented with no patterns. They key for a sturdy evolution of the blockchain community lies ter having many areas for improvement which support modularization protocols. Lots of systems can benefit by a decentralized exchange protocol and spil the adoption increases, wij will be able to contribute to its onveranderlijk improvements.