Council Post: The Rise Of Decentralized Cryptocurrency Exchanges

By Ibrahim Alkurd, CEO of New Mine, an industry leader in blockchain mining, and a founding partner of Lavaliere Capital, a digital asset hedge fund.

In a recent article, I talked about the growth of decentralized finance (DeFi) within the cryptocurrency industry. One of the sectors impacted by DeFi is the exchanges that cryptocurrencies are traded on. I am seeing massive growth in the demand for decentralized exchanges (DEX), such as UniSwap. I expect this demand to continue and the use of decentralized exchanges to grow in the coming years.

Decentralized exchanges pose a threat to centralized cryptocurrency exchanges. BitMEX, the world’s largest Bitcoin (BTC) derivatives exchange by volume, recently received indictments for its senior team. This sent shock waves across the industry and led to a massive pullout of coins from the wallets of centralized exchanges. People feared that other exchanges would be sued, and as a result, the amount of BTC sitting in exchange wallets fell to its lowest value since November 2018.

With the uncertainty surrounding centralized exchanges and the growth in demand for decentralized ones, it poses the question: What are the benefits of using decentralized exchanges?

Cheaper Transaction Fees

Trading on DEXs usually has lower fees when compared to trading on centralized exchanges. This presents a big risk to decentralized exchanges because crypto traders are always looking for the lowest rates to trade their assets. This competition may force centralized exchanges to drop their fees in order to compete with DEXs.

Lower Counterparty Risk

There’s a common saying in our industry: “Not your keys; not your coins.” This means that when you store your crypto assets on centralized exchanges or with any third party, you have no guarantee of ownership.

We’ve seen many centralized exchanges get hacked over the years and their users left out of pocket. This isn’t an issue with a decentralized exchange because cryptocurrency trades are made directly between people through an automated process without relying on intermediary institutions.

Financial Inclusiveness

Many centralized exchanges restrict people from certain jurisdictions from using their services. This is not an issue for DEXs because anyone from anywhere in the world can utilize them. This creates a much more inclusive and fair ecosystem.

Privacy

With the amount of data that’s collected on each of us, privacy has become a very important consideration for many people today. With DEXs, people don’t need to provide their information to third parties, and there are usually no registration requirements for using the exchange.

Despite these benefits, decentralized exchanges are in their very early stages, and a lot of development still needs to be done. Some of their disadvantages include a poor user experience, little or no customer support, only crypto-to-crypto trades, and scalability issues. In time, these things will improve, and as they do, decentralized exchanges will pose a major threat to centralized ones. I believe that over the coming years, DEXs will eat into the trading volume of centralized exchanges.