WTF are Decentralized Exchanges?

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Estimated reading time: 6 minutes, 1 second

A decentralized cryptocurrency exchange (DEX) cuts out the middleman by facilitating deals via smart contracts and atomic swaps. The cryptocurrency is never in the possession of an escrow service. The platform merely connects the P2P participants.

No Central Authority

Because there is no central authority to hack or shut down, DEX development will likely be the focus as crypto has gained popularity. Recently, the Securities and Exchange Commission went after EtherDelta’s creator, Zachary Coburn. The SEC charged him with operating an “unregistered securities exchange” because the platform did not register as an exchange or file for an exemption after the 2017 DAO Report. Coburn has already settled the charges, though he did not admit to or deny the charges. He paid $300,000 in disgorgement, $13,000 in pre-judgement interest and a $75,000 penalty.

We will likely see more decentralized exchanges where the creator is unknown to avoid dealing with the SEC. Satoshi was smart- don’t disclose your identity if you’re creating competition to the government. Platforms will also have to restructure to avoid having order books on a centralized server as EtherDelta did.

Anonymity, But More Difficult To Use

DEX platforms offer anonymity, but the trade-off is that the platforms are often harder to use. Fees are reduced because there is no central authority looking to take their cut. Since DEXs are not managed by a central party, users do not need to disclose personal information like their photo ID and address to trade.

Because Decentralized Exchanges are harder to use, they do not have the same liquidity that you find in centralized platforms. Additionally, if you lose your password, you can’t contact customer support. There is no third party to reverse any transactions.

These platforms also do not offer margin trading and stop losses like centralized platforms do. I don’t necessarily see that as a negative as that is one of the many factors that lead to the financial crisis of 2008 in the United States. Decentralized exchanges can also list an ICO or token because they don’t have a central server to shut down. Because of KYC and AML regulations, legitimate Decentralized Exchanges do not support fiat conversions, as this would introduce a point of centralization.

Another important thing to note is that the keys entered are not transmitted over the network, but stored in the browser cache. Make sure to protect yourself from phishing sites with extensions like Metamask, which will alert you if they feel you have gone to a potential phishing site.

There are two types of decentralized exchanges: currency-centric and currency-neutral.

Currency-centric exchanges are built on top of singular blockchain platforms like Bitcoin or Ethereum.

Currency-neutral exchanges connect different native cryptocurrencies. No conversion coin is needed as trades are peer-to-peer.


Bisq (Aka Bitsquares)

Bisq is the most well-reviewed exchange centralized or decentralized I have personally reviewed.

Pros:
  • Bitcoin exchange that accepts fiat & alt-coins – for fiat purchases you need Bitcoin as a security deposit that is returned to you after the trade
  • Every aspect of the platform is decentralized: open source code, management
  • P2P- trading cannot be stopped or censored
  • Bisq never holds your funds
  • Privacy Centric- all personal data is stored locally
  • End-to-end encrypted communication routed over Tor
  • DAO: The ownership of Bisq is distributed on the participant and its users. No single entity can control it
  • Bisq uses multi-signatures and security deposits to ensure the trust between two parties
  • Offers services to all countries
  • Arbitrator system to help resolve disputes
Cons:
  • Does not support payment methods with easy chargebacks like Paypal/Credit Cards
  • Trade periods vary depending on the payment method and location (Example: Bitcoin takes 10 min)

MorphToken- to get Monero

Pros:
  • Became the platform where people went to get Monero after Shapeshift was forced into KYC
  • Takes one crypto and outputs one or more cryptos via a Cake wallet
    • (Cake wallets are an Open-Source iOS Wallet for Monero, it accesses the blockchain transactions without having to run a full node)
  • Referral program via simple URLs or API
  • Operates without user accounts
  • Ability to split one digital asset to many others
  • Doesn’t use Google Analytics or an information 3rd party service to collect data
Cons:
  • IP addresses are logged for up to 3 months
  • Trades up to 45 days old can be queried by Input Address or Morph ID, after that time they disappear
  • Limited to Bitcoin, Bitcoin Cash, Ethereum, Monero, Dash and Litecoin

IDEX

Pros:
  • Full private key encryption- when users sign out; their private keys are destroyed from memory
  • Increased safety
  • Allows users to trade via Metamask and Ledger wallets – your private keys are not exposed to the site
  • Utilizes an off-chain trading engine that works alongside an Ethereum smart contract
  • User-friendly interface
  • DAO-based platform
  • IDEX allows users to cancel trades without paying gas
  • Smart contracts have an “escape hatch” feature allowing withdrawal from the smart contract after a period of inactivity
Cons:
  • Exclusively in Ethereum and ERC20 tokens
  • Higher gas fees than EtherDelta
  • Minimum order and withdrawal limits
  • Low Liquidity

Changelly

Pros:
  • Accepts US and EUR fiat, debit and credit (but rates are high, and you lose privacy)
  • Global use
  • High limits (on bank payments) and liquidity
  • An easy way to switch between altcoins
  • No deposit storage and instant money exchange
  • The largest offering of cryptocurrencies on the market
  • Competitive commission fee for crypto-to-crypto conversion
  • Acts like Orbitz or other airline sites that search for best rates using an automatic trading robot with  platforms like Poloniex and Bittrex
  • No deposit or withdrawal fees
Cons:
  • Email address is required to exchange coins, can opt for -2 factor authentication
  • High transaction fee of 0.5%
  • Low liquidity
  • Some complaints about withdrawal times
  • Higher rates than other exchanges when purchasing cryptocurrency directly

LocalBitcoins

Pros:
  • P2P platform to buy/sell crypto
  • One of the most private ways to purchase bitcoins
  • No buying or selling limits imposed by the platform
  • In some countries it is the only way to buy bitcoins
  • Allows you to buy bitcoins with many payment methods
Cons:
  • Many scams and you need to use caution
  • Government agents could be the party you are transacting with in person – proceed with caution
  • Requires an email address to set up
  • Trustworthy but users should not store bitcoins in the “LocalBitcoins wallet”
  • The reputation of the site is good, but users still need to check individual’s reputations
  • Fees can be slightly high when buying with cash since many people are willing to pay extra for the privacy LocalBitcoins offers
  • Some sellers will require ID verification for larger amounts
  • Not available in Germany or New York
  • Reversible payments shouldn’t be used (credit cards, Paypal)

EtherDelta

Pros:
  • You control your own funds
  • One of the first decentralized exchanges
  • Tokens on Etherdelta can be purchased earlier than on the other exchanges
  • Technical support responds quickly & can be contacted through the official accounts on Twitter and Reddit and chat on GitHub
Cons:
  • Order book matching handled by centralized Ether Delta servers allowing for censorship of orders in the order book
  • Had a security breach in 2017- A hacker took over their DNS server and launched a convincing replica of the site
  • Trades are only paired with Ether
  • Transfer of brand ownership
  • Creator was fined by SEC in 2018
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