Most of us subscribe to the notion of centralized banking and finance. The country you are from issues the currency you use. The widespread adoption of cryptocurrency trading on decentralized exchanges is changing this narrative.
All of a sudden, governments and central banks find their authority openly challenged. Tech companies and tech-savvy individuals have the same power as countries to create viable currencies. Regulators representing these countries spend their days trying to force these new currencies to peg themselves to the old ones. The truth is we’ve always been financially decentralized — new forms of currency are just cutting out the middlemen.
How Do Decentralized Exchanges Work?
Decentralized exchanges, known as DEXs in the crypto space, serve primarily as facilitators that allow buyers and sellers to talk to each other. Alongside reducing or eliminating middleman fees, a DEX offers a form of added security because buyers and sellers do not have to give their information to any 3rd party. Decentralization prevents trading volume and price manipulation and improves the ability of users to remain anonymous.
For all of its advantages, trading on a DEX means watching your own back at all times. A trading platform without a know your customer (KYC) process can offer no assistance if a user is hacked or cheated out of passwords, currency or private wallet keys.
Parts of a DEX can be centralized, and some exchange operators choose to maintain centralized control over some components of their platforms. For instance, Bancor froze all funds after being hacked for $13.5 million in assets. Regulators have also held DEX operators specifically responsible for violations — the U.S. Securities and Exchange Commission (SEC) held EtherDelta founder Zachary Coburn responsible for operating an illegal exchange, fining him $388,000.
Most DEXs are organized in the following way:
- A base decentralized exchange protocol
- A database order book
- A graphical user interface (GUI)
- Application programming interfaces (APIs) as needed for functionality
Decentralized exchanges are often mistaken for decentralized currency. Centralized currencies can be traded on decentralized exchanges and vice versa, barring regulatory blockages.
3 Best Decentralized Exchanges
Not all decentralization is built the same. Even top DEXs have weaknesses. Be aware of them before you commit your financial activity.
1. Best for Flexibility: 0x
0x is a DEX with the flexibility to create DEXs on it. Currently, there are quite a few DEXs that are operational on 0x. These include LedgerDEX, ERC dEX, radar relay, DDEX and Paradex, among others. 0x itself is built on the back of Ethereum and uses centralized databases to expand Ethereum’s utility.
0x traders may exchange ERC20 tokens without giving out any personal information, a feature that is rare for U.S.-based exchanges. Radar Relay features a no-fee structure.
2. Best for Anonymity: Bisq
Bisq is the place to be for people who want to exchange Bitcoin for national currencies without any KYC requirements. The platform uses Tor routing to decentralize operations, most importantly matching buyers and sellers. Its open source framework helps to ensure that no one person can be held accountable for regulatory violations in any jurisdiction. For the privilege of anonymity, you will pay around a 2% trading fee.
Bisq’s 2 major disadvantages include low liquidity and slow execution. However, it is one of the only stable, relatively viable exchanges that operates in the U.S. with no KYC requirements.
3. Best for Comprehensive Trading: IDEX
As one of the most popular DEXs in use today, IDEX has relatively high liquidity and a variety of trading opportunities. Once a user has connected to the exchange through a digital wallet, he can view a number of real-time order books with around 400 different trading pairs. Traditional investors will enjoy the use of market and limit orders and efficient buy/sell matching.
IDEX does maintain more centralization to offer these advantages, most importantly order execution. The company imposed stricter KYC requirements in August 2019 as a result of the SEC-EtherDelta debacle mentioned above. However, fees are lower on IDEX than on truly decentralized exchanges, totaling around 0.3% of a trade.
How to Create a Decentralized Exchange
The 0x protocol is one of the more accessible and popular frameworks for creating a decentralized exchange. To use this protocol, you will need to download node.js, Yarn, Docker and npx.
Here are the steps to make a simple exchange using the 0x protocol:
- Run the 0x creation wizard and connect to a test network such as Kovan or Mainnet.
- Use Infura.io to create an RPC URL to use and set the fee recipient and server port.
- After the front end finishes building, you can go to your browser and selected port to see your deployed launch kit.
The Most Decentralized Cryptocurrency
New cryptocurrencies pop up quite frequently claiming to be decentralized. In order to prove their claims, a currency should be permissionless and trustless at a scale that is actually useful to general society. With that in mind, here are a few with promise:
- Zilliqa: Uses sharding, a way to improve transaction frequency by spreading a computational workload over a network
- Tezos: Changes its central network nodes consistently
- Elastos: Built to share control between millions of nodes with the ability to infinitely expand
- Quarkchain: Also uses sharding
- IOTA: Already controlled by millions of nodes, with each new node adding a vote to increase decentralization
- 1inch: Uses an aggregation protocol, which routes trades to the platforms with the best prices and lowest fees
Of these choices, Tezos has the largest market cap, standing at over $2.5 billion. This is good enough to place it in the top 50 of all cryptocurrencies in the world. (IOTA is routinely in the top 75.) Because the number of users affects the amount of decentralization, the most decentralized cryptocurrency will always be in flux. However, the most decentralized cryptocurrency in widespread use at the time of this writing is Tezos.
Related content: How to Buy IOTA (MIOTA-USD)
Going Off the Financial Grid
The viability of decentralization certainly provides humanity with options concerning its collective financial future. As it stands, we are now in a tug-of-war between central banking and decentralized finances. The future of funding is happening now — choose wisely where you put your money.
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