Decentralized Web Montreal, a group devoted to exploring and evangelizing the benefits of decentralized technologies, held a meetup in Old Montreal to talk about decentralized exchanges (DEX). Attendees assembled the agenda by forming groups around different DEX sub-topics and then freely floating among the groups that interested you. The variety of the resulting mini-meetups hinted at an underlying truth of decentralized exchanges: there are trade-offs, and different groups have different preferences. The resulting discussions were quite heated (in a good way), and offer a great overview of the where the tech and community currently lies.
Decentralized exchanges allow users to exchange digital currencies with each other without depositing their tokens on a centralized exchange. Users remain in control of their funds in their own wallet, and trade by exchanging on a blockchain itself. Security is completely user dependent - not the exchange, nor any third party.
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With the semi-regular headlines of hacks and thefts from centralized exchanges (CEX), it’s no wonder that security was the first topic to announce itself as a group. It was well understood that DEXs remove trust from the exchange process by having the trade and settlement functions execute by smart contracts on underlying blockchains, like Ethereum. Thus, held safely in public smart contracts, third parties have no power to control users funds, suspend withdrawals, etc. Many people expressed the strong need to maintain this sovereign ownership of their digital assets. Bestowing the (private) key to their currencies runs counter to the P2P ethos on which public blockchains like Bitcoin were built. Losing total sovereignty as an individual investor, however, does not necessarily mean all centralized exchanges are inherently insecure. Organizations that run exchanges and trading platforms can take precautions such as storing coins in “cold” - offline - storage and ensuring they use the highest levels of encryption possible. Exchanges and trading platforms can also take additional measures such as building all technology in-house for added security.
By taking full ownership of your own digital currencies, users forgo the traditional recourse most investors receive from legacy financial institutions. If a user misplaces their private key, forgets their password, mistypes an order or a recipient’s address - there is no ‘support’ number to call.It’s reasonable to assume that some portion of less technical digital currency owners would feel uncomfortable trading on DEXs - or at least their current implementations. It’s for this reason that in a somewhat non-intuitive way, UI/UX for DEX projects has safety focused objectives. The goal is not simply for an enjoyable user experience, but actually to lead them down an action path safely, and protect them from errors.Many participants also echoed the sentiment that there is currently a usability gap between the best centralized and many decentralized exchanges. However, some members felt that DEX ease of use is finally gaining ground.
Perhaps the most heated debate surrounded whether or not DEXs can offer the same performance as CEXs. With CEXs, one company is managing the servers, controlling the order book, and matching the trades. Everything done under one roof has benefits in terms of communication and execution times. Trades are faster and more transactions are processed per second when you don’t have to ‘speak’ to tons of other nodes across a decentralized network.With nodes potentially being located across the globe, messages take longer to propagate than it does for a centralized company who relies on only its own servers. Milliseconds may seem like nothing, but for high frequency traders, those seconds can be the difference between profit and loss. By executing trades directly on the blockchain, DEXs are inheriting the underlying blockchain’s properties and limitations. This includes respecting the time it takes for blocks to be mined, and how transactions actually get included in blocks. Because of this time delay, DEXs have long faced a threat called front-running.Front-running in DEXs built on Ethereum happens when someone sees an exchange transaction in the mempool (pending transaction pool), including the public trade details, and creates a new order themselves to ‘cut in front’ of that order. They attempt to get in front by specifying a higher gas price to incentivize miners to choose their transaction first. If this front-runner is also a miner, the problems are worse, as the miner can pick and choose transactions to their benefit. There are technical solutions in the works for this problem.
The enthusiastic debates offered social proof that this is an important topic. After all, the argument can be made that the biggest use case thus far for digital currencies has been speculation/trading these assets. As blockchain technology matures and fulfills some if its grander promises, the ability to easily and safely exchange tokenized assets will remain fundamental. We’re already at a point where DEXs account for approximately 50% of all DApp usage on the Ethereum blockchain. Games such as CryptoKitties account for another 25%. These are blockchain’s killer DApps - thus far. We still have a long ways to go before DEX usage approaches centralized figures, but it’s fair to say that digital currency enthusiasts care deeply about how they exchange their assets. From the meetup’s passionate discussions, it’s clear that different participants place greater value on certain features. However, this can be said for all facets of blockchain technology, where projects and protocols must choose where they want to lie across a spectrum of decentralization.Image credit: meetup image
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