Almost 99% of cryptocurrency transactions are currently executed on centralized exchanges like Coinbase, Binance, Bithumb, Bitfinex, Poloniex, Kraken, and Gemini.
But these centralized exchanges are an anathema to blockchain purists. Though they have helped in driving mass adoption by facilitating fiat-to-crypto onboarding, their centralized functioning goes against the ethos of decentralization championed by the blockchain community. But on a more practical note, these exchanges are expensive, liquidity gets broken in to individual silos, and, most importantly, as they are not on the blockchain, they are not secure and prone to be hacked. Coincheck’s $530 million hack, Bitfinex’s $72 million hack, and the Mt Gox bankruptcy episode all point to the same thing — the crypto markets need decentralized exchanges to take over.
TOKEN2049 organized Asia’s largest digital asset event in Hong Kong. The event was held on 20-21 March 2018, and one of the most popular panel discussions was on DEX (Decentralized Exchanges). Balazs Deme from Herdius, Loi Luu from Kyber Network, Maxim Pertsovskiy from Waves platform, Michael Oved from AirSwap, and Ronald Bernstein from ParadexIO participated in the panel. Together, they focused on different concerns like the inevitability of DEX, front running, underlying protocols of DEX, open order book, access to liquidity, collaboration among DEXs and CEXs, scaling DEXs, regulations, and more. The founders & CEOs presented different approaches their companies were taking to decentralized exchanges. Bernstein was the moderator and discussed how the DEX ecosystem is evolving.
The Panel and DEX Approaches
Waves – Maxim Pertsovskiy (COO)
Waves offers a cryptocurrency platform for asset/custom token issuance, transfers, and trading on blockchain. During launch in April 2017, the Waves cryptocurrency platform announced the creation of the Waves DEX as a part of their initiative to reverse “Decentralized blockchain tokens … being traded on very centralized exchanges.” (Source)
Pertsovskiy believes token issuing is an easy process through decentralized exchanges (i.e. taking cryptocurrency directly to the exchange without the involvement of any third-party). Its USP is centralized order matching with decentralized settlement and fiat trade enablement.
Kyber Network- Loi Luu (CEO)
Kyber Network is a DEX that enables instant conversion of crypto-assets with guaranteed liquidity. It is focused on market makers for generating this liquidity. The exchange is run entirely on blockchain and Luu believes that as long at Ethereum is secure, so is Kyber’s blockchain.
Airswap- Michael Oved (Founder)
Airswap is a platform providing solutions to find, price, and trade tokens on the Ethereum blockchain. It leverages the swap protocol using peer-to-peer functionality without the involvement of third-party services. This is done to ensure the security of users’ investments. The systematic counterparty risk is made redundant with the Airswap framework.
Herdius- Balazs Deme (Founder)
Herdius is a new generation DEX and has built its own blockchain instead of relying on smart contracts. This blockchain acts as a transaction layer on top of all chains. This makes it scalable and, most importantly, flexible to not be limited to ERC20 coins. Its USP is its distributed virtual wallet network, which allows users to directly trade from their wallets.
Paradex- Ronald Bernstein (CEO)
Paradex is built on top of the 0x protocol; it allows for centralized matching without having to act as a custodian, the major issue with centralized exchanges. It is an ERC20 exchange (i.e. it only handles tokens following the ERC20 protocol).
Overall Learning Points
The panel discussion brought forward some salient points for the industry as a whole and what they need to execute to capture market share from centralized exchanges. Focusing on user experience and ease of interaction is vital in all tech industries and the same holds true for DEXs as well. A fully integrated approach by offering an end-to-end solution which encompasses regulation, market maker facilitation for liquidity, and fiat currency conversion would be most successful.
Herdius obviously believes that being blockchain agnostic and operating on a private key level is essential to win this market. An interesting observation was that every DEX wants to work only with stable utility coins, and some compatibility with fiat currencies is mandatory for them to replace centralized exchanges in the future. The ability to match trades of all sizes, ensuring liquidity, and to make sure the platform does not allow for front running are again important points for the growth of the DEX segment.
Regulatory issues need to be resolved for the orderly growth of the entire ecosystem. The problem is that each country has a different framework for execution, settlement, and custody, which is tedious to structure for global digital cryptocurrencies. What is positive for DEXs is that they collapse execution and settlement into a single step. This should reduce the compliance burden on them. Also, the overall community needs to communicate with regulators so that they can see the positive wealth generation that is happening in the industry.
DEXs finding solutions to the technological conundrum holding them back is not a matter of if, but when. But all admit that the hegemony of centralized exchanges is here to stay for the next couple of years. Many experts believe that both centralized and decentralized platforms will co-exist as they provide users unique benefits in their own ways. But DEXs are investing heavily in finding that solution that will act as a tipping point for the industry. After all, at stake is a potential trillion-dollar market.
Stephanie Vaughan is vice president at Block X Ventures. She is an experienced capital markets professional with a background encompassing crowdfunding, venture capital, and investment banking. She served as director of capital markets and development at StreetShares, a marketplace lender focused on providing small business loans to veteran-owned companies funded by Institutional, Regulation A and Regulation D investors. At StreetShares, she led all strategic initiatives for investor products. She also played a key role in raising the company’s $23 million Series B financing. Previously, she was a senior associate executing venture debt transactions for LunaCap Ventures and was an investment banking associate with Houlihan Lokey. A former captain in the United States Marine Corps, she served as communications and operations officer and held strategic roles assisting in re-designing the USMC Force and overseeing anti-terrorism efforts for U.S. Central Command in Afghanistan. She holds an MBA in Finance from Columbia Business School and a BA in Quantitative Economics from the United States Naval Academy.