The future of decentralised exchanges
Centralised exchanges (CEXs) are essentially in breach of the foundational principle and the promise that blockchain and cryptocurrencies offer. Perhaps technical infancy of the blockchain project explains why the vast majority of crypto enthusiasts currently trades their assets on CEXs but times are changing: decentralised exchanges (DEXs) are on the rise, and thankfully so.
DEXs are safer, cheaper, less intrusive and obviously more in line with the principle of decentralisation that underpinned the creation of blockchain in the first place. While no exchange is perfect, improvements are being made every day. As such, DEXs will play an increasingly important role in bringing crypto-economics into the future.
Here we outline some of the areas DEXs are bound to impact and why they are key to shaping the future economy.
Liquidity: assets and trade volume
The majority of CEXs charge a high fee for listing currencies on their platform. DEXs work differently and provide easier access for companies to get their tokens on the marketplace. As DEXs gain more traction we can therefore expect a growing variety of interesting assets to become available to traders. This drives healthier market dynamics.
When it comes to trade volume, currently DEXs are mostly suited for low-volume trading of popular coins. The reason is that most trades still happen on CEXs. However, considering that DEXs are practically immune to hacks and have no single point of failure they are highly preferable for any trader concerned with security and reliability.
So, as DEXs grow in popularity and supply, we can eventually expect their mainstream adoption in the crypto-sphere.
Another area where DEXs play an important role has to do with fungibility - a crucial condition of healthy economics. Fungibility describes interchangeability between assets of equal value: a 100 dollar bill for a 100 dollar bill. When fungibility decreases, for whatever reason, trade processes are at stake.
To explain: when it comes to a plain dollar bill in our wallet, unless it’s stained with blood, we have no way of knowing if we are using ‘blood money’ or not. Therefore, we generally don’t discriminate between assets of equal value and there is no impediment to their exchange.
When we go to buy something and pay in cash, no questions are asked as to where the money came from or who it previously belonged to: it is taken at face value.
Transparent open ledgers, however, enable traceability. In the case of Bitcoin, it is relatively easy to see an asset’s transactional history. If an asset is tainted, a conscientious crypto trader can choose not to trade.
This is good news for proponents of full transparency, but it threatens fungibility. Not just at the level of trade, but also at the level of regulation.
With both rogue and just governments around the world circling the blockchain in search of ways to provide oversight, it may well be that if certain assets are linked to criminal activities a government may decide to seize those assets. Even if the person who holds those assets has nothing to do with it.
This may not sound so bad but it is important to realise that, depending on a government’s stance, it may as well seize assets related to activism, opposition, defection, critical journalism or any other activity that threatens the status-quo.
CEXs, in particular, due to their reliance on gatekeepers, could be pressured to seize assets as soon as they leave a trader’s wallet. As DEXs operate trades on a peer-to-peer basis they escape that risk. As such, DEXs are crucial to safeguarding fungibility.
Looking ahead, DEXs uphold the idea of uncensored money and place trust and power in the conscience and integrity of individual traders.
Whereas connectivity is generally read in a positive sense as enabling efficiency, widening horizons and underscoring human interdependence, it also raises concerns about privacy, vulnerability and manipulation.
Blockchain and a crypto-economy that is committed to decentralised trade empowers connectivity in its positive qualities.
As DEXs continue to develop and merge into a single decentralised ecosystem, we can see a connected economy where human labour to control issues of trust and authentication is automated, where the threat of fraud is largely eliminated, where the incorruptibility of data prevents manipulation and where power is distributed in the periphery.
Over time, as blockchain technology becomes the backbone of various industries and new start-ups find ways to generate value, DEXs play a vital role in making sure new assets find their way into an economy characterised by transparency, liquidity and high fungibility.
While we still have a long way to go before we will see crypto assets become mainstream, we have no doubt that DEXs will be key to realising Satoshi’s dream of a truly decentralised modern economy.