The latest turbulence in the crypto market has renewed the debate about crypto life and its longevity. Actually, has it ever stopped? It turns out that the volatility of the market is an inevitable phase that we should all go through in order to finally find ourselves with a fully evaluated and stable crypto system. Money will be lost, ICOs will fail, many of the cryptocurrencies will disappear but most importantly we will be free of all the downsides of the traditional financial system. By that I mean “bye bye” fiat money, regulations, financial institutions, middle-men, centralized markets and you name it. Fasten the seat belts — it is not going to be easy!
Although there is no chance to avoid the process, there is a way to accelerate and eventually to ease it. How? By active participation in the process of decentralization. Because while you are losing funds during the latest decline, the centralized system is never going to lose even a single “coin”. Moreover, it is going to report a huge profit and “sudden” increase. One of the biggest centralized exchanges had a first half revenue for 2018 of $300M, despite currencies like Bitcoin losing 52% of its value during the same period. Furthermore, it is expected to grow up to $1 Billion by the end of the year.
The reason is the existence of the middle-man institution itself managing our assets in a centralized way through which the big company is always winning while the users are mostly losing. The solution? Take control of your own assets and trade them by yourself. Where? On Decentralized Exchanges (DEX). Yet another big debate has recently started named “for and against decentralized exchanges”. The web has been flooded by criticism and praise, buckets of advice and warnings, tones of fake news and wrong information. But some of the false statements keep circling in the web space, initially creating FUD. The purpose of the article is to answer some of the most absurd criticisms against the DEXs.
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Let’s bust some myths!
1. Decentralized Exchanges are prone to hacks.
I recently came across a statement saying that “Money can and has been stolen from decentralized exchanges despite the fact that many community members considered them un-hackable”.
An example might be a decentralized exchange built on top of the Ethereum Network — with a smart contract running on the blockchain. In highly critical areas ranging from aviation to banking smart contract safety is crucial. If the smart contract was designed incorrectly with even one potential security issue, due to the lack of quality tests, security audits etc, then yes — we can say that the decentralized exchanges are prone to hacks. But you can say that for any software system with poor design and lack of tests and security audits (let’s not forget that decentralized applications are still software systems)
However, if the smart contract was developed correctly and if the smart contract was fuzz tested, audited by security experts, ethical hackers, then you can consider it safe. Even more if the smart contract was tested on a public test network for quite some time you can be even more confident that it’s safe.
Now there is some ways of “hacking the decentralized exchanges”, which has nothing to do with the blockchain itself.
The DNS servers could be hacked. This is the famous case of EtherDelta. A hacker hijacked its DNS server, enabling the attacker to send users to a fake, malicious version of the site. Consequently, the hacker was able to steal funds from users who unknowingly imported their private keys into the fake website. It stops the access to the real website which is supposed to redirect the users to the exchange. Instead the user enters a different website, which is hosted on the attacker’s machine but has completely the same interface, and gives away consciously his private information. This is far more dangerous than the common phishing attacks in which fake sites sets up a domain name similar to the real one. Apparently, the smart contracts that govern EtherDelta’s behavior weren’t compromised in the attack.
As you see, the hack has nothing to do with the Smart Contract and the blockchain. How to protect ourselves from such a fraud? Always double-check the address you are making a deposit to. Use MetaMask or any hardware wallet (Trezor, Ledger).
Another scenario is the lack of decentralization — when the DEX is actually not fully decentralized. Such kind of “hack” occurred recently on a popular exchange. The mistake was rooted in the architecture of the code — it turns out it was highly centralized. Although it’s claimed that the exchange is decentralized, the so-called “owner” of the contract has so many privileges, included in the code, that it actually makes it centralized. The “hack” was made in a simple way — “Withdraw Tokens” function was invoked, which according to the code, can be used only by the “owner”. It appears that the private key of the owner was stolen or misused hence being nothing but a human mistake. In this case the so-called decentralized exchange was actually centrally controlled.
As you see, it is not a mistake of how the contract functions but of how it has been created. How to protect ourselves in such a case? Always make our own due diligence and double-check the code. If you lack the tech knowledge, find someone who can do it for you. The contract should be not only publicly available but also well-audited.
2. Inability to convert between Fiat and Crypto
Really now? The fiat currency is a product of the traditional financial system. What is this system? — centralized, so is its money. We want to create a whole new decentralized world around the cryptocurrency where there will be no place for old habits, respectively for fiat currency. If everything goes smoothly in a few years we should be able to buy everything with Crypto. Why then to burden the innovative decentralized exchanges with traditional money and to stop the evolution of the cryptocurrency market? There is no place for fiat in the concept of decentralized world.
3. Low liquidity
Liquidity comes with consumption — the sooner people start using decentralized exchanges, the bigger flow of currencies will flood into the DEXs. Once users realize how convenient, safe and easy-to-use the DEXs are, the balance will easily tilt in favour of the new decentralized marketplaces. Let’s go back to the begging. What was the liquidity rate of Bitcoin back in 2009 when just a few people dared to use it? Now Bitcoin is the number one crypto currency, traded on each and every exchange that exists. I predict the same future for DEXs.
Some steps have already been taken in the right direction. Apps like “Totle” make efforts to aggregate the liquidity of the top decentralized exchanges.
4. Less interoperability — weak inter-chain trading
A real problem indeed which is now undergoing improvement and will soon hopefully find its happy end. A possible solution is the so-called “Atomic swaps” which provides a decentralized environment where users can trade between each other currencies from different blockchains. The problem will be eventually solved once and for all when the Lightening Network and Plasma are officially established. Then we will have a better user experience when we are talking about atomic swaps, because right now, even when we have atomic swaps, the user experience is not good enough, because of the network delays.
Let’s not forget that the technology is at very early stage and still under development. It is cruel to take advantage on something that is going currently under construction. Improved interoperability is one of the main goals of the DEXs so maybe it is better to observe the process peacefully and to wait for future results. One of the best advantages that DEXs have is the unlimited ability and space to develop. A lot of scalability solutions are going to take part of this improvements — Raiden Network, Plasma, Beacon Chain, POA Network, Loom Network and many more.
The right direction always leads to bright future.
Four busted myths so far and so much more to be seen from DEXs. As we see, nothing in the crypto world comes easily. Moreover, none of the old conservative systems have ever been replaced with no efforts. There is a lot of advancement needed for the blockchain technology until to ensure it stays with us for the long term. Better be part of it than regret missed opportunities.