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Are Decentralized Exchanges Ready for Mass Adoption?

Are Decentralized Exchanges Ready for Mass Adoption?

 

Bitcoin and other cryptocurrencies were created to offer an alternative to fiat currencies, which are controlled by governments and other central financial institutions. With cryptocurrencies, the decentralized nature of the digital currency meant that they were controlled by the community instead of a central authority. As such, the idea of cryptocurrency became linked to decentralization. A decentralized currency does not require trust to be placed in a central authority, such as a bank controlled by the government. Even today, despite many cryptocurrencies not possessing a fully decentralized structure, the idea that cryptocurrencies should not belong to one centralized source remains a core tenet of the crypto community.

The main combination of decentralization and centralization can be seen with cryptocurrency exchange platforms. Centralized exchanges currently outshine decentralized exchange platforms in the crypto trading industry. It seems intrinsically dissonant for a fully decentralized cryptocurrency to be traded on a centralized exchange platform. However, the sheer volume of trades coupled with the extensive list of popular trading pairs continues to draw traders toward centralized exchange platforms.

 

The Popularity of Centralized Exchange Platforms

 

Centralized exchange platforms may have gained their popularity by mimicking what crypto users already know, namely the stock market and Forex exchanges. Traders have become accustomed to using certain advanced trading techniques, such as stop loss or margin trading, and want to trade cryptocurrencies using the same techniques. However, cryptocurrencies differ from stocks on a foundational level. The different may seem small but is quite significant. With cryptocurrencies, the owner is the entity which possesses the coin’s private key. With centralized crypto exchanges, users place their coins on the exchange by entrusting the private keys to the exchange. If an exchange is hacked or folds, the coins are lost and cannot be recovered by the user.

The losses suffered in the Mt. Gox incident in 2014 and the Bitfinex hack in 2016 are just two events that illustrate what can go wrong when private keys are entrusted to centralized exchanges. These events, and others, have shown the need for decentralized exchange platforms.

 

The Rise of Decentralized Exchange Platforms

 

A decentralized exchange platform (DEX) is one that allows individuals to maintain full control of their private keys and make transactions in a direct, peer-to-peer manner. On a centralized exchange, users are required to complete Know Your Customer (KYC) verifications, in addition to other identification procedures, before being registered to the exchange. In contracts, a DEX is a trustless platform in which users are not required to complete KYC verifications or lengthy registration processes. Trades are made using proxy tokens via multi-signature escrow accounts. This also allows DEX users to enjoy anonymity, unless a trade involved a bank transfer. In the case of a bank transfer, the party’s details are revealed only to the person they are buying from or selling to. While the increased privacy may seem like a benefit, it also poses a potential problem. Because decentralized exchanges require so little identification verifications from users, it becomes difficult to subpoena the exchange or any of the users, should a user encounter a scammer or other nefarious individual.

With centralized exchanges, there is a single point of failure; if the main server of the exchange goes down, then the platform cannot be used until the server is restored. With a DEX, there is no single point of failure. A DEX is hosted over a distributed network of nodes, reducing the risk of attack or server down time. By decentralizing the hosting of the exchange, decentralized exchanges become difficult to shut down by a government or other controlling power.

 

While there are a lot of positive aspects of decentralized exchanges, there are also some downsides to using such an exchange platform. A decentralized exchange represents an idyllic concept of decentralized currencies being exchanged over a similarly decentralized platform. However, current technology is not advanced enough to allow the DEXs that are running to attract the majority of crypto traders. Many decentralized exchanges are either still in their infancy or still being tested.

Current DEXs only allow for very basic trading to occur. They are known for being less user-friendly than centralized exchanges, and face scalability issues. When compared to centralized exchanges, decentralized exchanges are much slower. For example, Binance is capable of processing 1.4 million orders per second. IDEX, a decentralized exchange, can only process between 20-50 orders per second.

Many crypto traders choose not to use DEXs because they are unable to trade their desired pairs on the DEXs available today. The trading volume on these DEXs are very low, as compared to centralized exchanges, and raises concerns regarding the level of liquidity of these exchanges. In addition, because there is no central entity overseeing the exchange, finding a resolution to issues a user might encounter on a DEX is difficult.

The challenges of a decentralized exchange are not the only things that deter users. Another barrier, especially for new investors, is that fiat currency is not widely used and many of these types of exchanges do not support any use of fiat currency.

 

Current Options for DEXs

 

There are some decentralized exchanges that are up and running. OasisDEX is one such exchange and is a Dapp built on the Ethereum blockchain. Created by MakerDAO, OasisDEX is currently in its alpha testing phase. With OasisDEX, users can trade the pairs ETH/DAI, MKR/ETH, and MKR/DAI after creating an account with MetMask.

With OasisDEX, all orders are made on-chain and directly between users. One negative aspect of this DEX is that the transactions are known for being slow and expensive. Every action, from transferring crypto to cancelling orders, requires gas. Moreover, this DEX is vulnerable to front-running, as users can pay more gas in order to have their transaction mined faster.

Another exchange platform aims to solve the issue of expensive and slow transactions of fully decentralized exchanges with a hybrid model. IDEX offers cheaper transactions, faster order placement, and no front-running. Orders are booked off-chain but matches are made by the exchange. Once a match is made, a smart contract is used to settle the order. IDEX validates each transaction before submitting it to the Ethereum network. With IDEX’s hybrid model, coins are kept off the exchange and in the control of the user. The exchange is compatible with ERC-20 tokens and has one of the largest trading volume of current decentralized exchanges.

 

Will DEXs Gain Traction?

 

Centralized exchanges are also looking at how they can benefit from a partially decentralized structure. This past June, Huobi announced that it has begun developing the Huobi Chain Project. The Huobi Chain Project will be a decentralized autonomous organization (DAO) and will eventually be folded into the exchange. Huobi does not plan to be 100% decentralized but believes there is a benefit to finding the proper balance of centralization and decentralization.

Other technologies, such as the CounterParty protocol, act as a smart contract layer for transactions. When trades occur using the CounterParty protocol, funds are held in a decentralized escrow service until the order is matched. Protocols such as this, along with other technologies such as the Atomic Swap, will allow decentralized exchanges to develop further.

While currently, decentralized exchanges are not the preferred exchange platform of the crypto community, they may well represent the future. Once the right technologies are developed that can fully support DEX platforms, these exchanges may be more widely used.

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Become A Crypto Trader Today!

Cryptocurrencies are everywhere in today’s world. You can hardly go one day without hearing about Bitcoin or the blockchain technology that supports it. You’ve probably been wondering if this strange, new industry is something you should get involved in. At first glance, it may look like the cryptocurrency market is too confusing or too complicated. However, the truth is that you don’t need anything special to become a crypto trader. All you need to do is make the decision to get started and, before you know it, you’ll be trading crypto. In this short guide, we’ll break down some of the research you’ll need to do before you get started trading crypto.

Step One: Follow the Market

Once you have decided to become a crypto trader, you must learn about the market. The cryptocurrency market can be very volatile, so it is important to start to follow and understand the market before you begin trading. Coin prices tend to fluctuate based on the foundational free market law of Supply and Demand. There are, however, some other market influences to consider.

Coin prices on the crypto market can fluctuate greatly in a short period of time, such as within one day. ‘Whale investors’ is an example of one group that can cause significant price fluctuations in the market. Whale investors are individuals who hold a large percentage of a specific cryptocurrency. When whales create a buy wall for a specific coin, many smaller traders will begin to buy that coin, as they expect the price to rise. As the demand for the coin increases, so does the price. When the price gets to a certain point, whale investors will sell off large portions of their holdings. This causes the price to fall dramatically. It is important to watch out for buy and sell walls when you are trading crypto.

Another market influencer are “Pump and Dump” schemes. Here, the team behind a specific coin speculates on the coin price in order to drive the price up. After the Initial Coin Offering (ICO) is over, the team sells off their holdings and the price of the coin plummets. Those that invested in what they thought would be a profitable coin are left with a coin that is basically worthless. You can avoid such scams by researching an ICO thoroughly before you invest.

Finally, delays in transaction completion can cause significant volatility in the market. Depending on the coin you are purchasing and the blockchain the coin is built on, transactions may not be instantaneous. In the span of time between sending your transaction and completion of your transaction, the price value of the coin may have fallen, causing you to lose money in your trade. You can avoid this by making sure you know the average time to complete a transaction before you trade a coin.

To gain more understanding of the market, you can read market analyses, register with a signal provider to receive updates, and follow trusted crypto news outlets. The more you understand the market and its influencers, the more comfortable you will be in choosing which coins to trade.

Step Two: Understand Coin Basics

Before you start to think about which coin you will trade, you must first understand the basics of cryptocurrency. A cryptocurrency is a digital currency which consists of coins or tokens that are supported by blockchain technology. These cryptographic coins each have their own economy. Some cryptocurrencies, such as bitcoin and ripple, have a finite supply of tokens. The maximum number of possible tokens is called a ‘hard cap’. Other cryptocurrencies, such as zcash or monero, have no hard cap.

It is important to understand how many coins are currently available, as the closer the market gets to the hard cap, the higher the demand and the price will be. Additionally, you must understand what the market capitalization of a coin is before you decide to invest or trade that coin.

The market capitalization of a coin is calculated by multiplying the current supply of the coin by the current price of the coin. Do not confuse the current supply of a coin with the hard cap of a coin. These are two different figures. The market capitalization (market cap) can give you a cursory understanding of the value of a coin. This may be helpful information as you decide whether or not to trade that coin. Generally speaking, if the market cap of a coin is growing, the coin shows promise and is considered to be doing well in the market.

The 24-hour volume and the 24-hour percent of change are two more pieces of information that can help you better understand a coin. Many smaller cryptocurrencies will have a smaller volume and a larger percent of change. If you are just starting out, you may do better trading a cryptocurrency with a larger volume and smaller percent of change.

Be sure to watch the market analysis and graphs for the coins you are interested in trading. Understand whether the coin has a hard cap, and how that figure compares to the current available supply. Additionally, you should start following the 24-hour volume and 24-hour percent of change to learn how the coin is currently being traded. There are many stock trading lessons that can be applied to cryptocurrency, and this knowledge will help you to better understand the coin you want to trade.

Step Three: Choose a Cryptocurrency

You have already done a lot of research and, no doubt, have learned a great deal about the cryptocurrency market. Finally, the time has come to purchase your first coin! You may ask yourself “What is the best coin for me? Which should I choose?” The truth is that there is no clear answer to this question. Every trader must find their own answer to this question.

Before you invest in a coin, it is important to understand the details of that coin. You will want to make a decision that is as informed as possible. First, do a quick Google search for the coin you are interested in and read the latest news and opinions about that coin. Then, head over to the cryptocurrency’s website. Read all the information provided on the website, including the coin’s whitepaper. You don’t need to understand every aspect of the coin, but you should aim to collect as much information as possible so that you can make an informed choice.

Step Four: Choose an Exchange

After you have read through the website, you need to research the process to purchase the coin on a cryptocurrency exchange. Before discussing points of consideration for choosing an exchange, it is important to understand that cryptocurrency exchanges are not entirely secure. It is advised to only place the coins you are actively looking to trade on an exchange. Exchanges are not the proper place to store your cryptocurrency for long periods of time. Instead, store your digital currencies in your cryptocurrency wallet(s). You can learn more about choosing a cryptocurrency wallet in Step Five.

To start, research cryptocurrency exchanges that can be used by individuals residing in your country. Depending on local laws and regulations, you may not be able to use certain exchanges. It is important to research these laws and regulations to understand which cryptocurrency exchange platforms are available for you to use.

After you’ve created a list of available exchanges based on your location, research how purchases are made on these exchanges. If you are a new crypto trader, you may not have any cryptocurrency yet. As such, be sure to choose an exchange that allows the use of fiat currencies. However, after you’ve bought some cryptocurrency, you will be able to participate in more exchanges and your options will increase. Now, you must research to find out if the exchange you wish to use supports the coins that you wish to trade. Not all exchange platforms support all coins. It is best to choose an exchange that supports all of the coins that you wish to trade.

Finally, further narrow down your short list of exchanges by ensuring that the exchange platform has adequate security and positive reviews. Cryptocurrency exchanges are often a target of hackers. You want to be sure that the exchange you choose to use is legitimate and secure.

Now that you have created a short list of exchange platforms that you may want to use, you may want to register for a few exchanges so that you can get a feel for how the exchange works. Many traders list user experience and the user interface of the exchange platform as a top factor when choosing an exchange. Make sure that the platform is easy and comfortable for you to use. If an exchange platform is not user-friendly, cross it off your list and continue to look into only the platforms that are comfortable.

Next, research the fee structure of the exchange. Different exchanges levy different fees for transactions. Some charge fees on only certain transactions, such as selling cryptocurrency, and offer other transactions for no fee at all. Miner fees, or network fees, may also be levied. These charges are often set at an automatic rate by the exchange and are used to ensure that transactions are processed by miners. Be sure you understand all fees associated with using the exchange platform.

Finally, it is important to understand how long transactions take on the different exchanges. Due to the volatile nature of the crypto market, the shorter the transaction time, the better. Some exchanges may have longer processing times, with some transactions taking days to complete. Before you finalize a trade, be sure you understand how long it will take to process the transaction.

Protect Your Accounts

Cyber security is an important topic in general, but even more so when it comes to cryptocurrency. Because of the unregulated nature of the industry and the semi-anonymity enjoyed by users, it can be nearly impossible to track down stolen coins. Protecting your accounts and private information is of the utmost importance in the crypto industry.

You already know that you should chose a strong password and that you should not use the same password for more than one account. Unfortunately, too many individuals choose to take the easier route when it comes to cyber security and opt for ease of access at the cost of security. In addition to choosing strong passwords, it is critical to also enable two-factor authentication (2FA) on both your cryptocurrency accounts and any associated accounts, such as the email account used to register for the exchange..

Two-factor authentication adds another layer of security to your accounts by requiring a one-time password, in addition to the required passwords, before allowing a user access to their account. If an attempt is made on a 2FA-enabled account, the user received notice and can take action quickly if the access attempt is not authorized.

There are varying levels of 2FA. The easiest type of 2FA is a code that is sent to the user’s mobile phone via SMS. This can be a dangerously low level of 2FA to enable on an account as it is easily bypassed by hackers. In mid-August 2018, an American crypto investor filed a lawsuit against AT&T, alleging that the telecommunications company gave a hacker access to the investor’s mobile phone account. This allowed the hacker to bypass the investor’s 2FA and access their cryptocurrency account.

Email-based 2FA is also not recommended, as it provides a single point of failure which makes it possible for a hacker to gain access to a user’s email account and hide incoming emails. No matter which 2FA you choose to use, it is recommended to never keep scanned copies of your passport, or other legal identification, on any cloud-based storage platform.

Two of the most secure 2FA options are the use of an authenticator app or a hardware app. Both come with benefits and disadvantages. The benefit of an authenticator app is that it is connected to your mobile device, so you have it when you need it. Additionally, these apps change the authentication code every 30 seconds, making it harder for hackers to access the information and use it in such a small timespan. However, if your mobile device is stolen, your accounts may be at risk. Hardware authenticators are about the size of a USB drive and, once connected through the computer’s USB port, give the holder access to the websites that host the accounts they want to remain secure. The disadvantage is that the hardware key must be physically kept on the user and is vulnerable to loss, theft, or damage.

While any 2FA is better than none, there are better options that a phone-based 2FA. Generally speaking, the best 2FA are those that eliminate any third party from participating in the process. Cell phone companies and email servers are third-party operators that open the door for a potential hack point. Follow common security protocols and never give personal information, including passwords, to anyone over the phone. Enable 2FA on your accounts so that you are protected from the start against hackers and crypto thieves.

Step Five: Choose a Wallet

Choosing a wallet is a bit easier than choosing a cryptocurrency, as there are less factors to consider. Before anything else, you will want to find the wallet that supports the coin(s) you have chosen to purchase. Some wallets will only hold one type of cryptocurrency, while others may hold multiple coins. Depending on the coin(s) you purchased, you may have to use more than one wallet.

Decide whether you want your wallet to be “hot” or “cold”. A hot wallet is one that is kept connected to the internet. While this offers a certain amount of ease in terms of transferring your coins to an exchange, it is also vulnerable to online attacks. Cold wallets, on the other hand, are great for the long-term storage of your coins. They are much safer than hot wallets since they are kept offline. Here, you have a few options to choose from:

  1. Paper wallet – Using a paper wallet entails the use of a software that prints out your private key on a piece of paper. The benefit of these wallets is that they are not vulnerable to hackers and coins cannot be lost due to a power outage. If you use a high-quality laser printer along with high-quality paper and ink, then the paper keys you print out will be resistant to water damage and tearing. However, if you chose to print with a cheaper printer, then you may find the paper to be vulnerable to water, fading, or tearing. Additionally, if you lose the printouts, you lose your coins.
  2. Hardware wallet – These wallets are designed to hold a specific currency, so it is important to ensure that they are compatible with the coins you intend to store on them. Hardware wallets are beneficial for long-term storage. They are about the size of a flash drive and require both a security code, as well as the associated software, to access your cryptocurrency. If someone steals your hardware wallet but doesn’t have your security code, they are unable to access your wallet. The vulnerability of this wallet is similar to any electronic device – water exposure or a spike in electricity can damage the device and your ability to access your holdings.
  3. Software wallet – This type of wallet is a program that stores your cryptocurrency on your personal computer. If your computer is not connected to the internet, then your wallet is protected. However, once connected, it becomes a hot wallet. While this allows for you to easily transfer your holdings to an exchange should you wish to make a trade, you also open yourself to be a potential target to hackers and other crypto thieves. Unfortunately, there are some cryptocurrencies that can only be stored in a software wallet.

You Are Now a Trader!

Now that you have completed all your research and made all of the necessary decisions, it is time to start trading. Trading cryptocurrencies can be fun and exciting. The research you do will give you a deeper insight to new technology, ideas, and companies. You’ll be able to play a part in this up and coming industry by becoming a trader. If you are new to the crypto community, you will find that while you have a lot to learn, the learning will be fun! Once you complete your first trade, you’ll quickly be back for more of the action.

When researching the different topics suggested in this article, you must be sure that the information you are getting is accurate and reliable. Using a signal provider, such as Knocks.io, can help you to learn about many of the current events in the crypto market. This will help you to focus your learning and research, as well as understand the market much more deeply.

Stop dreaming and start on your path of becoming a crypto trader today!