The Two Types of Decentralized Exchanges
felicity last edited by felicity
With the high working sense of Vite developers in the last minute of ViteX. Let's see what are the Dex?? This post is named "Two Types of Decentralized Exchanges"
As exchanges revolve around transacting currencies, there are two fundamental exchange models: currency-centric and currency-neutral. Either of these models can be centralized or decentralized, depending on how the four key functions of the exchange are handled.
Currency-centric exchanges are built on top of singular blockchain platforms, such as Ethereum. A currency-centric exchange is limited to escrowing only the currency of the platform it is built on, such as ERC20 assets and other contracts if the exchange is built on top of Ethereum. This is the way traditional exchanges are built.
The newer model is currency-neutral, which is architected to connect different native cryptocurrencies, meaning that users do not have to adhere to any specific currency ecosystem. These systems allow users to trade cryptocurrencies without a coin underlying that exchange, which acts as a sort of additional “middleman” to go through since it is no longer fully peer-to-peer. Examples of these models include Bisq, altcoin.io, and flyp.me.
These newer projects allow for securely matching and handling order books, and not just asset exchange, in a decentralized manner, which is done using the blockchain. Because an exchange is a community of users, there has to be a way to broadcast and match orders. One way of trustless trading is through “atomic swaps” for order matching, but atomic swaps alone cannot create a trustless marketplace, as it is done from one specific peer to another, rather than as a broadcast to anyone on the network. An atomic swap is when a trade is done in a single, or atomic, operation, as opposed to two separate transactions (such as first sending one coin, then waiting for the receiver to send their coin). This is facilitated through smart contracts that act as a trustless escrow holding onto one currency until the other user sends their currency as well when both currencies can be released.
The Pros and Cons of Decentralized Exchanges
The most obvious benefit of a DEX is the same as with any decentralized application, which revolves around the philosophy of cutting out the middlemen and returning interactions to peer-to-peer, permissionless models without central authorities. More specifically, decentralization creates censorship-resistance, which in the case of decentralized exchanges means that no central authority could forcefully impose regulations, or even ban currencies and/or the exchange itself. This is especially important considering that many countries are clamping down on cryptocurrency trading. For example, the two most populous countries on earth, China, and India, have banned cryptocurrency exchanges, while countries including Mexico, Russia, Saudi Arabia, and Brazil have restricted cryptocurrencies.
Without Decentralized Exchanges, the peoples’ ability to invest in crypto is subject to governments, so cryptocurrency becomes hardly more democratic than traditional asset markets. Governments can exert control over centralized exchanges, and users are subject to authorities who may at any moment track and tax users, or ban currencies.
Other merits of a DEX include heightened security. Massive security attacks, such as the roughly $470 million that was stolen from Mt. Gox, were only possible because the centralized hot wallets of the exchange were targeted, which presented a single point of failure. In a DEX, each user is in private control of their own funds, so there is no central point of attack. However, as we’ll get to later, many exchanges claim to be decentralized, such as Bancor, but are truly hybrid, and their centralized aspects present vulnerabilities. For instance, around $23 million was recently stolen from Bancor, and Bancor responded with a freeze attempt built into their protocol, which is only possible with at least a partially-centralized architecture.
As we’ll see, DEXs use Smart Contracts to facilitate transactions, such as using contracts as an escrow for peer-to-peer transactions. If the contracts themselves are highly secure, then the exchange benefits from the cryptographic security of the underlying blockchain. However, this is often not the case, and Smart Contracts can contain many vulnerabilities, including underflows, overflows, reentrancy attacks, and many more. In fact, studies have found over 34,000 contracts with known vulnerabilities. These facts, alongside recent hacks such as the Bancor attack, reflect the need for Smart Contract Auditing to validate the security of the contract code and find any back-door vulnerabilities.
Further, a DEX could facilitate faster and cheaper transactions than a centralized exchange, since there is no third party authenticator. Currently, this is just theoretical and has yet to be proven by exchanges on a large scale, as DEXs have not achieved the “network effect” of reaching enough users for critical mass.
The largest drawback of current DEXs is the lack of functionality, relative to centralized exchanges. Most DEXs only support basic market functions, and not even features such as margin trading and stop loss. The technology has simply not yet caught up with the ambitions of most decentralized exchanges, though DEXs like BlockDX are planning to support additional functionality.
Lastly, because of the KYC and AML regulations mentioned earlier, Decentralized Exchanges do not support fiat conversions, as this would introduce a point of centralization. Instead, users must use cryptocurrency deposits.
As far as I know ViteX has completed its development and testing of internal smart contract 0.1; analysis of requirements for version 0.2 and already on the stage of designing and implementation of the system. Completed design of backend services and began implementation. As Chris Li, from Vite Labs has stated on his latest write-up, ViteX will be a completely decentralized system, unlike other current ones - semi-dex. Can not wait to see how ViteX grows to be revolution, and how $VX can be something cool
bonita_v last edited by
@felicity so there are two types of ex call currency-centric and currency-neutral?