The Future of Trading is Decentralized
Although centralized exchanges (CEXs) currently dominate cryptocurrency trading activity, decentralized exchanges (DEXs) have been rapidly gaining in popularity. And that’s not surprising. After all, DEXes are far closer to the vision of cryptocurrencies than any other model.
Decentralized exchanges enable peer-to-peer trading by using automated smart contracts to execute trades without the use of a middleman. It’s what crypto was always about — a distributed, trustless model.
Not all DEXs, however, use the same underlying infrastructure. While some organizations continue to use traditional order book models, others have adopted emergent liquidity protocols. Developers are creating new aggregation tools, in addition to exchange and liquidity protocols, to address the disjointed liquidity that is inherent in decentralized exchanges.
What is Decentralized Trading?
A DEX is a peer-to-peer service that allows direct transactions between two interested parties. It establishes this peer-to-peer market directly on a transparent ledger, that we call the blockchain, allowing traders to monitor transactions in real-time independently. Like any other application of the blockchain, this public ledger provides complete transparency to all traders in the ecosystem, with sellers interacting directly with buyers. This process’s decentralized nature eliminates the need for a centralized entity to settle the transaction. In other words, a DEX eliminates the possibility of a centralized authority exercising control and deciding what assets can be traded and when.
What are Decentralized Assets?
It isn’t just conventional crypto assets that are decentralized. Now we have NFTs — in the form of in-game items, art, music and so much more — that can be transacted in an entirely decentralized manner. Decentralized currency, peer-to-peer money, and digital currency are all terms that refer to methods of transferring wealth or ownership of any other commodity that does not require the use of a third party.
Several centralized markets still rely on fiat currencies issued by a central bank, such as US dollars. Or they use centralized stablecoins which ultimately go against the spirit of crypto. It’s almost ancient if you take a closer look at the model. But that’s not all.
Centralized exchanges vs Decentralized exchanges
Cryptocurrency exchanges are an important source of liquidity for the global crypto market, facilitating billions of dollars in daily trading volume. Leading exchange platforms are scaling in response to increased demand for digital assets, new trading features, offering asset custody and functionality, and access to an ever-expanding number of digital assets as the market grows.
Decentralized exchanges, or DEXs, have grown in popularity alongside traditional centralized exchanges, with disintermediation as a core philosophy of the blockchain community. Decentralized exchanges take a different approach to buy and sell digital assets:
- They do not use an intermediary organization to clear transactions, instead they rely on self-executing smart contracts to facilitate trading. This dynamic allows for instant trades, often at a lower cost than on centralized cryptocurrency exchanges.
- DEXs adopt a non-custodial framework in the absence of intermediaries. This means you retain ownership of your cryptocurrency and are in charge of managing your wallets and private keys. Holding your private keys is considered advantageous for users who want complete control over their assets.
- However, this comes with the risk that your keys can be lost, stolen, or destroyed; or, in the unlikely event that you become incapacitated or pass away unexpectedly, your keys will be inaccessible if no one knows your password.
The Future of Trading is Decentralized
Decentralized exchanges seek to address nearly all of the issues that plague centralized exchanges. Here is a summary, followed by a breakdown of the various disadvantages of centralized exchanges and how decentralized exchanges address them.
- Data Storage Security
The most serious vulnerability of centralized systems is using online databases to store their users’ public and private keys. As a result, they are an excellent target for hacking. Deloitte, Uber, Dropbox, Equifax, LinkedIn, Docusign, OneLogin, BlueCross Blue Shield, Verizon, and the SEC are just a few companies whose cloud databases have been compromised.
Clearly, being a large organization with sophisticated security teams isn’t a deterrent against threats to extremely confidential client data ranging from medical records to credit card information. Going by past records, it is safe to assume that at least a few of the centralized cryptocurrency exchanges will be hacked.
By integrating with hardware wallets, decentralized exchanges enable users to safely store their coins in cold storage while also trading tokens. This eliminates the possibility of large-scale hacks because there is no centralized cloud database containing users’ private keys.
2. Server Downtown Issues
Since October 2017, almost every time the price of Bitcoin or Ethereum fluctuated, most centralized exchanges experienced large-scale outages.
Decentralized exchanges that are well-designed will have the advantage of functioning similarly to Napster or BitTorrent: as more people log in to transact, the overall capacity of the system does not noticeably slow down.
3. Identity Breach Risks
Because many governments have recently begun to regulate centralized exchanges for tax and oversight reasons heavily, most of them have begun to request personally identifiable information from their users: address, social security number, copy of passport, copy of ID or driver’s license, and copy of utility bill before the user can trade above a few thousand dollars. Clearly, this information is at risk.
By definition, decentralized exchanges do not necessitate authentication. The only requirement for trading is the possession of a hardware wallet or a web wallet. To put it another way, anyone can trade without first logging in or creating a profile. There will be no social security number or ID photo to steal if there is no profile.
4. Laborious Verification Processes
Because of the large number of documents that these centralized exchanges must manually review, verification can take days or even weeks. Furthermore, most exchanges charge deposit and withdrawal fees, which necessitate additional verification steps.
Decentralized exchanges do not have this problem due to the lack of a requirement for authentication and the lack of deposit/withdrawal limits.
5. Price Manipulation
Front running and/or insider trading are frequently accused of taking place on centralized exchanges.
Front running is the illegal practice of using insider information to purchase securities, knowing that other purchasers will buy the same stock or currency and then selling it at a higher price.
Insider trading is defined as having advanced knowledge of a new coin listed on an exchange and personally amassing large amounts of it in anticipation of a price increase upon its listing on the exchange.
Decentralized exchanges are designed to avoid these issues because the order book is built on a public blockchain. When you submit an order, a transaction (tx) is created and sent to the network. As a result, any party who checks the public blockchain will be notified of the transaction simultaneously.
Decentralized Exchanges attempt to avoid this through a variety of means, including:
- Listing tokens as they launch.
- Having a public and transparent framework for deciding which tokens to list, for example, by market cap.
- Token holders democratically decide which tokens will be listed in a decentralized decision-making process.
GameStar.Exchange and its role in this new economy
GameStar.Exchange is a decentralized P2P trading platform built on Polkadot that supports cross-chain BTC/ETH/USDT/BNB/DOT transactions. A cryptocurrency exchange supports P2P transactions with gift cards, game items, game currency, and NFTs. It will eventually provide more services and transaction capabilities in these massive markets. It expands on traditional peer-to-peer exchange markets by constructing a powerful DeFi engine for increased community engagement, streamlined trading, reduced fraud, and improved incentives. P2P transactions allow users to convert assets on the chain while avoiding high transaction fees.
The authenticity of chat and trade data is critical for P2P transactions. However, this information is stored on a third-party server in centralized exchanges, which risks data leakage and/or tampering.
GameStar.Exchange employs an open chat protocol based on 256-bit symmetric AES encryption, RSA 2048 encryption, and the Diffie-Hellman secure key exchange protocol to achieve end-to-end encryption of chat messages. Simultaneously, GameStar.Exchange signs all chat messages with a private key and timestamps added to the blockchain to ensure that the information is not tampered with.
Although centralized exchanges handle the vast majority of market activity because they provide security, regulatory oversight, and often insurance, the growth of DeFi has created space for the development of decentralized crypto exchange protocols and aggregation tools. The proliferation of additional protocols and supporting mechanisms is anticipated to accelerate as the DEX market grows.
About GameStar Exchange
GameStar Exchange is the world’s leading decentralised P2P trading platform built on Polkadot for Gift Cards, Game Items, and NFTs. Providing an efficient, safe and profitable platform for global digital asset enthusiasts.