Why acquiring a Decentralized Exchange Solution will establish a strong future for your enterprise in the industry?
Bitcoin has rallied close to the $47000 mark recently which is the highest in more than two and a half years. It has outperformed the growth witnessed in Defi tokens and decentralized exchanges.
A combination of factors like more inflow of institutional money and a supply crunch has caused a bullish run for Bitcoin. This has made the notion clear that cryptocurrencies are set for mass adoption soon.
Some of the major issues that cryptocurrency exchanges are facing are
- Exchanges that do not comply with the KYC (Know Your Customer) and AML (Anti Money Laundering) norms are forced to reduce their scope of operations in jurisdictions where the rules are strictly implemented.
- Those exchanges that do not disclose the crypto holdings of their investors and taxes paid on profits have been penalized or debarred from trading temporarily by the regulatory bodies.
- Those platforms running illegal derivatives trading have been banned from onboarding any new investors.
- These steps are done mainly to make crypto service providers more compliant though many feel that it is an attack on their financial sovereignty.
How can a Decentralized Exchange Solution prove to be a viable alternative in this situation?
- Centralized crypto exchanges suffer from various security loopholes and are often targeted by hackers resulting in fund losses worth millions of dollars affecting both their reputation and credibility. Many top centralized exchanges like Mt.Gox, Bitstamp, Bitfinex, and CoinCheck have been hacked in the past few years.
- Some of the decentralized exchanges making waves currently are Uniswap, Synthetix, Curve Finance, Waves DEX, IDEX, and Balancer.
- They do not have access to the information and the assets of any of their customers.
- They have replaced the role of a broker with robust smart contracts and the derivatives trades are settled between different users.
- A programmable smart contract allows the market makers to set the fees for managing the transactions and for accepting an order and posting it in the order books.
- Any underlying asset of the user can be effectively transformed into a derivatives instrument quickly.
- There is also no requirement for traders to follow KYC procedures ensuring faster user onboarding.
- Establishing a peer-to-peer contract model might offer better spreads, flexible terms and conditions, and deeper liquidity for the users.
- The privacy and safety concerns faced in centralized exchanges can be countered by giving users a permissionless method to invest with leverage and swap assets.
- It can solve certain technical issues like network congestion and high processing fee which affects the scalability of a platform.
- Self custody of the funds is a great incentive for users to join the decentralized movement.
- By having the entire exchange operate on a distributed ledger, it eliminates the chances of a single point of failure by offloading both the control of funds and the trading activities to the automated smart contracts. There is no possibility of server downtime as well.
- They charge lower fees through minimal overhead requirements.
- They help in better price discovery through off-chain order books, order splits, and P2P negotiations.
How does a Decentralized Exchange Solution function?
- A user can use his/her wallet address to register on a decentralized exchange. There is no formal sign-up process.
- An order can be placed on the platform by specifying the number of cryptocurrencies to be exchanged at a particular rate, and the time till which the bidding of assets is allowed.
- Your order request will soon become public and other users of the network will start submitting their bids on the platform.
- Once the bidding time has expired, the system automatically identifies and executes the best offer with the help of smart contracts.
The different challenges faced by a DEX Development Company
- Despite showing promising signs of growth, the liquidity in decentralized exchanges is far less when compared to their centralized counterparts.
- The user experience is still inferior and professional traders or wealthy investors may not find anything special in decentralized exchanges than centralized exchanges.
- They do not have any advanced trading tools like margin trading, futures trading, take-profit, stop-loss orders, and limit orders on their platforms.
- There is a lack of interoperability between various decentralized exchanges in the market-leading to vulnerable infrastructure and limited differentiation from a centralized exchange. There is a need for more cross-chain exchanges to emerge for more decentralized exchange platforms to seamlessly interact with one another.
- The speed at which they validate each transaction on the blockchain network takes time and is low when compared to centralized exchanges like Binance and Coinbase.
- The smart contracts which they depend a lot on can have certain vulnerabilities in the form of reentrancy attacks, overflows, and underflows.
- Since they do not follow KYC and AML norms, they do not accept fiat currencies which can affect local traders who do not have any exposure to cryptocurrencies.
- Frontrunning is another issue affecting the decentralized exchanges as the transaction remains held in a pending mempool. This leads to the need for setting a higher gas price so that the new transaction will soon be mined first into the block.
Why can a Decentralized Exchange Solution witness strong growth in the years to come?
By enabling users to control their own funds without any intermediaries and by offering top-notch security, they could very well shape the future of the financial system worldwide. As more businesses use blockchain technology in their operations, the holders of digital assets will demand more control and security in their engagement with the different exchanges.
Despite the severe economic crisis plaguing the world, the cost of Defi tokens has grown by more than 100% since the beginning of the year. Many individuals, as well as institutional players, are entering the market now attracted by its immense potential.
They need to solve the liquidity issue sooner than later as orders will take a longer time to be filled keeping new traders away from these platforms. They can improve the user experience by getting rid of the order book or by introducing an atomic swapping facility for traders. Decentralized exchanges will definitely witness a huge rise in popularity as there is a strong future in the business model.