The cryptocurrency market had its bright moments of glory, and while the recent news may sometime be upsetting, the decentralized exchanges are charged for further competition and cutting-edge developments. The path of platforms evolutions is hard, complicated and has many issues. To understand the market, one needs to consider vital questions: what is the difference between the centralized and decentralized exchange? Each of them has their pros and cons, but the progress is merciless and we soon about to witness significant changes which are inevitable. What is HFT, what benefits and hardships of implementation in modern DEX does it have? We provided you with a brief story to make all these points clear.
Classics are not immortal
The blockchain technology helps to perform a global transition to the economy that does not require the trust of third parties for the exchange of goods. However, today’s crypto exchanges are mostly centralized, and that causes numerous severe threats: they are vulnerable to hacking, do not react well to the specific processes associated with blockchain technology – such as hard forks – and are often associated with the risk of getting under the plume new regulations by implemented by different world governments. Centralized crypto-exchange exchanges may soon become obsolete, as they miss the opportunity to use blockchain technology and thereby improve their capabilities and effectiveness.
The existing problems of centralized exchanges are numerous: lack of liquidity, vulnerability, risks of losses and thefts as a result of a centralized operating principle. The exchanges present a tasty morsel for hackers, given that billions of transactions are made through them every day and servers store user money.
Decentralized exchanges or DEXs, on the other hand, are aimed at solving problems that are inherent in centralized structures as they create P2P-markets powered by the mighty blockchain tech – usually Ethereum – which allows traders to store funds and operate them further independently.
However, despite the convenience of the user and high volumes of trades, the exchanges like Coinbase, Kraken, and Poloniex are indeed centralized. The funny issue is that all of them do not quite fit the philosophy of “decentralization”— which is pretty ironic in this case.
Decentralized exchanges R&D
Different industry experts agree that decentralized exchanges have two main advantages: full anonymity, more advanced security measures and the global market coverage.
Moreover, decentralized exchanges differ from centralized exchanges, as they allow users to control their funds directly, managing their most important functions on the blockchain: they use the technology of the crypto currency itself, thereby ensuring the security and transparency of the trade. However, a vital flaw of decentralized exchanges is that they have limitations of their core – the blockchain they are based on. Moreover, the absence of algo trading limits the target audience of traders.
Well, one may think that the trading itself is associated with numerous risks – those that traders agree on themselves, and they are unlikely to accept to face additional unnecessary risks, which lead to a not very efficient game.
Outlining the main advantages we see that using DEX there is no need to trust users’ funds to third parties, and his means that the funds are safe, and confidential data is stored in a safe environment.
However, the DEX have also certain weak points that need to be taken into consideration: the problems of scalability of the blockchain system, which is based on them; the inconvenience of usage, moreover – certain difficulties with liquidity, complexity of payments and transactions, and absence of fiat money.
Will the HFT be possible on truly decentralized exchange?
Throughout the long & bumpy road of the market new strategies, unusual calculations and trading ideas appeared. One of the trends of the last two decades are the algorithms of high-frequency trade which perform operations for a fraction of a second, which is completely inaccessible to the human eye.
What is the main issue of implementing HFT on decentralized exchanges? One of the key challenges faced by DEX is the slow blocks mining for high-frequency trading. Extraction is completely dependent on hashing and the ability of the program to quickly solve “complex” computing tasks. In order to accommodate high-frequency trading on decentralized platforms, specific semi-centralized systems are developed. They are off-chain services that do not include transactions into the common data chain.
Of course, in case of any problems of implementing HFT on DEX not only traders will suffer, but also providers of algorithmic trading tools and bots.
“Our team has not yet studied the possibilities of HFT on decentralized exchanges, but this is certainly important and necessary for everyone”, – says Kamilia Arslanova, CEO Arbidex, platform, allowing to trade any crypto asset at the best rates through cross-exchange arbitrage chains in a single-window interface. “Because to remove intermediaries and earn more is the dream of any trader. So, a new round of development for the Arbidex platform is decentralization and arbitration on decentralized platforms. The platform name Arbitrage & DEX stands for it”.
The DEX market race
At the moment, the world finest enter the race to compete in the creation of the leading decentralized platform. The two giants go hand-in-hand is the race trying to develop and present the best possible solution.
On the one hand, quite recently, the CEO of Binance Changpeng Zhao announced a demo of the platform’s decentralized exchange – three essential features of the planned exchange, those being the creation, the listing, and trading of tokens had been shown. However, as the launch date had remained in secret, it remains to be seen when the is the number one crypto exchange by trade volume, according to Coinmarketcap will be marketed and what volumes it will be able to handle.
Moreover, the longtime competitor which is Hong-Kong based Bifinex has its own plans, having introduced their plans much earlier. The competitor high-performance exchange will be called EOSfinex and will combine the speed and scalability of the EOS.IO blockchain with Bitfinex’s expertise in the crypto market, according to the statement. The crypto exchange stated it had researched a number of protocol-level technologies to assess their compatibility with a high-volume, blockchain-based platform.
“First of all, I wouldn’t say that we should somehow compare decentralized and centralized exchanges. They have totally different target audience. So, the algorithmic traders will never go to the decentralized exchange. – says CEO EXMO crypto exchange Sergey Zhdanov.
“Centralized exchanges on the contrary have better interface, they have advanced features, mostly they are easy to use, they have fiat, liquidity, trading tools – I could go on and on forever.
What is the main disadvantage I see? The exchange controls funds. So that is the key goal for the market we need to overcome. So I see the future as a centralized exchange with decentralized users funds.” The most decent existing exchanges having the most extensive trade volumes have a bad history of loops within unreliable security systems or lack of user-friendly interface.
So there is a hope, that fully decentralized exchanges will partly guard the users from the thieves, excluding any third part from the process of trading.