There are few evangelists more vocal in the crypto landscape than the decentralized exchange (DEX) advocates, and this group includes more than a few heavy-hitting crypto leaders in their ranks. Even Ethereum co-founder Vitalik Buterin recently stated, “I definitely hope centralized exchanges go burn in hell as much as possible.”
There’s a reason DEX believers feel so strongly; hackers stole a whopping $731 million during the first half of 2018 from exchanges — almost all of them centralized. Centralized exchanges process transactions in a single back-end location and require users to deposit funds into a large exchange wallet — an irresistible treasure for hackers.
Many DEX advocates stake their preferences in the fundamental philosophy of blockchain technology when Satoshi first described cryptocurrency as a tool for peer-to-peer payments “without going through a financial institution.” And to many, a centralized exchange that facilitates all trading activity isn’t much different than the finance giants Satoshi sought to escape.
Decentralized exchanges don’t just offer their users elements that support the core principles of Nakamoto’s blockchain (no intermediary) — they also provide tangible benefits in the form of increased security, less technical downtime, and usually, lower fees. Though DEX models vary, they all share an essential design characteristic — they spread processing power across a network rather than concentrating it in one data center.
DEXs should be big — but they’re not. DEXs process only a small fraction of daily cryptocurrency transactions while centralized exchanges take the lion’s share.
So why don’t DEXs have a larger following? Well, there are a few reasons — and they’re all reasons that the Amplify Exchange is setting out to resolve with our hybrid decentralized/distributed exchange design.
Liquidity and Volume
Liquidity and volume are two challenges that plague DEXs. Liquidity refers to the degree that high-volume movements in a market affect the market’s overall behavior. Liquidity is affected by ease of exchanging assets, and the assets’ supply level. Liquidity problems are not exclusive to decentralized exchanges either; one trading experiment determined that many exchanges, both centralized and decentralized, inflate their reported volume and reflect significant price variations after experiencing one $50,000 transaction as traders on the platform respond to supply changes.
These liquidity problems make cryptocurrency more volatile and less appropriate for day-to-day uses such as paying merchants (in the case of cash-like coins such as Bitcoin) or spending on specialized platforms (in the case of utility tokens such as AMPX). That is why cash — usually considered the most liquid asset available — has yet to succumb to crypto, because it consistently holds its value.
Liquidity is a challenge across the crypto world, but it’s an even higher hurdle for decentralized exchanges where trade volumes are typically low. A recent analysis found that top-performing DEX, Bancor, still ranked behind 70 other centralized exchanges in 24-hour trading volume. Bancor processed about $10 million, a fraction of centralized exchange Binance’s $2 billion. Low volumes make prices in these markets more volatile, as relatively small transactions can significantly alter markets.
And volatility is an even bigger challenge for decentralized exchanges thanks to usability and transaction time challenges.
Volume is a major factor in liquidity. Ease of exchanging assets is another; for example, turning fiat cash into a wide range of goods and services. Low volatility makes exchanges easier, but so do factors that make the user experience better, faster, and easier. This is another area where the entire cryptocurrency world struggles, however, DEXs struggle more than others.
Cryptocurrency is far from mainstream, but centralized exchanges have made significant strides in bringing new users into the fold by offering user-friendly options for becoming involved with exchanges, wallets, and merchant payments. For example, big exchanges like Coinbase offer intuitive interfaces for buying cryptocurrency that require little technical knowledge. Centralized exchanges’ single off-chain processing location means they can handle transactions faster than decentralized ones, which use more complicated and dispersed (albeit more secure) processing methods.
A CoinMarketCap analysis found that the most popular trading pairs on centralized exchanges, including Bitcoin/USDT and Ethereum/USDT, aren’t usually available on decentralized exchanges. That means potential new DEX users must first obtain a legacy token on one exchange, then transfer it to a separate DEX to trade for altcoins; this process can be laborious, slow, and challenging for new users. And Price volatility means that trading delays can be ruinous for crypto traders — token prices can change between the time a trade is agreed upon and when it settles.
The Future of the DEX
At Amplify, we believe that DEXs will play a central role in the future of cryptocurrency. But we also think the liquidity and usability problems DEXs face today are serious — too serious to believe mainstream adoption or even wider DEX adoption in the crypto community is likely to happen any time soon unless some significant changes take place.
That’s why we’re proposing a hybrid solution, blending the best features of centralized and decentralized exchanges.
The Amplify Exchange will be launched in two phases. During phase one, it will operate much like a traditional centralized exchange. There will be an easy to use interface, followed by an institutional quality trading platform. The other features that set Amplify apart in this phase are its direct fiat-to-altcoin conversion options, its 100+ available trading pairs, and its customizable trading tools. During phase two, we’ll launch Amplify Decentralized, a decentralized crypto exchange. The Amplify Bridgechain, a distributed ledger record of the exchange, will operate over a global network of Amplify Nodes while synching Amplify Distributed with Amplify Decentralized transactions. The resulting hybrid exchange combines the security and accessibility of decentralization with speed and trading pairs that match (and exceed) those offered by today’s centralized exchanges.
DEXs still have promise — but they’re unlikely to succeed without significant structural changes that will help them achieve better liquidity and usability. Fortunately, Amplify is offering a next-generation exchange by combining the best of what both worlds have to offer; we’re showing the world that DEX’s aren’t dead — they’re just ready to evolve.