A study of decentralized exchanges conducted by the analytics firm Alethio in July 2018 found that exchanges which claim to be decentralized have a relatively small amount of trading and liquidity and aren’t truly decentralized. It is found that so-called decentralized exchanges actually have varying degrees of centralization.
Decentralized exchanges have become a popular idea in the cryptocurrency community, since they would allow people to trade cryptocurrency without the oversight of a centralized organization. This would theoretically allow anonymous trading, lower fees since there is no centralized organization trying to make profit, and much less hacking and exit scams since users can control their cryptocurrency instead of depositing it into the exchange’s accounts.
According to the report, IDEX one of the biggest decentralized exchanges, facilitated 69,339 trades during a two-week period, fewer than the 92,024 trades Bitfinex conducted in a two-day period. Bitfinex has far lower volume than the biggest centralized crypto exchanges such as Binance, Huobi, and OKEx.
The other leading decentralized exchanges Bancor, 0x, and EtherDelta, had fewer than 10,000 trades. Therefore, as of now, decentralized exchanges have low trading volume and low liquidity, making them a sub-par choice for traders looking to make optimal traders. Further, decentralized exchanges can’t be used by institutional investors since there would be tremendous slippage, not to mention they don’t have proper regulatory compliance and licensing.
As far as decentralization is concerned, there has been controversy recently over the fact that Bancor was able to seize funds from users with some previously hidden code after a recent USD 13.5 million hack. The way Bancor exerted control makes them a centralized exchange in this respect. Also, Bancor only has a single market maker on the exchange – itself. This inherently makes the trading process centralized.
0x is a protocol for creating exchanges on the Ethereum network and claims to be decentralized. However, 0x works by allowing relayers to build markets on top of the protocol, and these relayers can exercise centralized control. One of the relayers, Paradex, has been purchased by Coinbase and collects all of the standard KYC identification data to be compliant, making it the same as any centralized exchange. So basically, 0x is a bunch of centralized exchanges built on a decentralized network. One benefit of 0x that makes it somewhat decentralized is users hold their own cryptocurrency instead of holding it in an exchange account.
The biggest decentralized exchange, IDEX, fundamentally relies on a centralized website, which is the case for most so-called decentralized exchanges. If this website were hacked the exchange would at the least be very difficult to use, if not totally unusable.
Two of the biggest exchanges in the world, Binance and Huobi, want to transform into decentralized exchanges. However, the leader of this project for Huobi, Gordon Chen, admits that full decentralization is probably not possible. He says, “We’re not 100% sure if a corporation can be 100% autonomous. We’re not sure if it can be 100% decentralized either. But we believe there can be some kind of balance in between.”
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