Decentralized assets (cryptocurrencies) have a major chunk of transactions being traded on centralized exchange platforms. The cryptocurrency was created for financial disruption: the elimination of all intermediaries and mediators. The premise of cryptocurrency exchange development is also that there is no need to place one’s confidence in centralized authority. Then why are all the most common cryptocurrency exchanges centralized?
Centralized Crypto Exchange Platforms
In certain aspects, a centralized exchange platform constitutes a move backward in terms of serving the aim of several cryptocurrencies, which is decentralization. The future of DeFi with regards to cryptographic assets appears firmly targeted at completing peer-to-peer transfers. It is similar to how DeFi considers its future of traditional finance without financial institutions as stewards of financial instruments.
Challenges with Centralized Crypto Exchanges
Operating on a centralized exchange implies paying the expense of accessibility. Centralized exchanges can keep the liquidity flowing using fees (transfer percentages & flat prices). Those new to cryptocurrencies, and even most cryptocurrency enthusiasts, tend to be drawn to the usability of regulated exchanges. Yet these exchanges do have challenges and vulnerabilities of their own.
Decentralized Crypto Exchange Platform
In traditional finance, the typical DeFi cases include the existing financial sector. We are thoroughly informed about its applications and pressure points, after all. DeFi proposes the involvement of no intermediaries, fewer charges, and fewer unreasonable rule-based exemptions. We can describe the variations between centralized exchanges and decentralized exchanges platforms (or DEXes) in a similar manner.
An Efficient Alternative
A DEX offers transaction facilitation essentially by automating trading processes, not interference. Using a DEX, apart from a password, does not require any central authority to take care of your funds, as well as no personal information. Core principles of most DEXes involve pseudonymity and user protection, and no central body entrusting users’ personal information. A decentralized exchange establishes a trustless network that enables users to only associate with one party. It can be the contract you trade with or the person you trade with.
Challenges with Decentralized Crypto Exchange Platform
Then, why does the exchange of transactions on decentralized platforms account for only 1 percent of all cryptocurrency exchanges, given some exponential growth in DEX usage recently?
The explanation for this can be an inefficient user interface. It results in a lack of acceptance as well as a lack of assets for enhancement and liquidity assets. Ultimately, it hinders scalability and highlights the technological shortcomings of DEXes. Account termination is irreversible and solely a user’s fault. There are fewer resources available to address this challenge. Also, poor liquidity is another concern. As more users trade with the DEX than expected, the scalability challenges increase. It leads to clogging the network and transaction times with increased fees (if there are any) and other alarming side effects.
We must first maintain the strengths of basics for DEXes to solve their scalability issues and prosper. It requires selecting the correct blockchain platform on which the DEX runs.
Developing a Decentralized Crypto Exchange
Each blockchain comes with its advantages and limitations. Any exchange must select carefully upon which framework for the project development. For example, stakeholders must consider the technical requirements of a DEX design from the beginning as a framework for decentralization. It must have frameworks that not only minimize the scalability burden but also match up to stringent security requirements.
Ensuring Privacy, Security, and Scalability
With the use of cryptographic primitives such as zero-knowledge proofs * and promises, blockchain will include a protocol that retains consumer confidentiality. The above-mentioned protocol function helps users to finalize trades without exposing their identity or sharing numbers. User protection is not only important from the viewpoint of an individual trader but also a prerequisite for stock trading exchanges.
The blockchain protocol, in addition to preserving the identity of individual traders, provides another significant advantage to trading on the market. When a user loses their private key and/or login credentials, present-day DEXes have no means of recovery. It is a problem that seriously hampers widespread acceptance. However, those means are given by a blockchain solution, since this is yet another prerequisite for stock trading.
Conclusion
Only one percent of all cryptocurrency transactions account for decentralized crypto exchange platforms. Thus, the overall market size of the cryptocurrency market dwindles compared to the current financial market. It has a cumulative market capitalization of listed firms that is twenty times greater than the entire cryptocurrency market when we look at Euronext for comparison. It shows that the best-decentralized finance and exchange is yet to come.
