Disruptors getting disrupted?
By: Moazzam Khan
Tags: Research Reports, Cryptocurrency News, Crypto, Blockchain, Decentralization

Introduction

Decentralized exchanges (DEX hereafter) are a critical part of the decentralized ecosystem and are posited to become even more important in the time to come. This sentiment has been resonating all around the blockchain world and has influenced some of the biggest crypto heavyweights ( centralized exchanges) to enter the DEX space, in order to avoid getting disrupted. This paper introduces some of the opportunities that DEXs enable before examining the motivations of some of the biggest centralized exchanges’ for entering the DEX space.

Opportunities

Decentralized exchanges are not only a platform that facilitate trustless exchange but also an enabler that begets various use cases like the ones identified below.

i. Identity managed trustless token exchange: A user could use a decentralized identity management system (Civic, uPort, etc.) to log into a decentralized exchange that allows the user to execute trades on the fly in a completely secure and transparent manner with complete control over their funds. Such a solution is likely to appease regulators and users alike. Regulators can be assured that the user is who they claim they are (subject to their review of the identity management service’s systems). Users will not have to fill in credentials or laborious sign up forms each time they log in or sign up on a new DEX.

ii. Asset management funds and decentralized stablecoins: A Decentralized autonomous organization (DAO) could easily use a Schelling point system to obtain a market data feed to re-calibrate their fund. The re-calibration could be done through executing the funds orders using APIs exposed by some decentralized exchange. Similarly, decentralized-collateralized stablecoins like Maker Dai could use a decentralized exchange to rebalance their portfolio to maintain the reserve value of their tokens in circulation.

iii. OTC desks: Front-running is a major issue for users of OTC desks given the size of their orders and the immediate profit the exchange/OTC provider/ could earn by engaging in such malpractices. Decentralized exchanges eliminate the chances of such immoral activities by being relinquishing control over order queuing which is verifiable on their public chains.

iv. Gamers and wallets: Decentralized games are coming up and they often feature in game collectables or victory credits (tokens) that could be monetized if converted to a more currency-esque token. Decentralized exchanges could be used to do just that, enabling a whole new dimension of gaming monetization. Gamers could now earn money by converting their in-game assets to cash by leveraging DEXs. Similarly, a wallet could be used to convert incoming tokens into the user’s token of choice. For example, if a user prefers ETH over all other tokens, a decentralized exchange could be used to swap/exchange the tokens immediately before they are credited into the user’s wallet and after the sender sent BTC.

Centralized exchanges moving towards decentralization

The crypto-asset ecosystem relies on centralized exchanges as a platform for trading, investing, and to a lesser extent, storing their assets. Centralized exchanges have, more often than not, abused this position and privilege by charging outlandish listing fees, charging exorbitant trading fees, and losing user assets. This was why decentralized exchanges were coming up with aspirations of disrupting the centralized exchanges by being more user-centric. As DEXs are trying to gain steam, centralized exchanges like Binance, Coinbase, Bitfinex, and Bithumb, amongst others, have recognized these benefits and potential for disruption too and are keen on having their own DEXs. A quick overview of the state of decentralized exchanges of these behemoths is examined below.

Paradex

Coinbase was the first major centralized exchange to have a DEX. It did so with its acquisition of Paradex in May 2018[1]. Paradex is a decentralized exchange on Ethereum that uses its clean and intuitive interface to relay orders to 0x’s order matching smart contracts before finally settling the trade on Ethereum.

This acquisition is part of Coinbase’s commitment to investing in decentralized infrastructure to further their open financial ecosystem initiative. Furthermore, Paradex is part of Coinbase’s advanced user offering where it will be integrated[2] with Coinbase Pro thereby exposing advanced traders to more crypto-assets and a different trading experience.

Ethfinex trustless

Ethifinex trustless is a hybrid decentralized exchange that runs on Ethereum’s network and is operated by the same team behind Bitfinex, one of the largest crypto exchanges (9th according to Coinmarketcap on 5th October 2018), and USDT, the most widely adopted stablecoin (with over USD 2.8 Billion in circulation[3]). It was launched in September 2018[4].

Ethfinex Trustless ambits to solve the liquidity problem that all decentralized exchanges face by sharing its order books with those of Bitfinex as well other decentralized exchanges and protocols. Additionally, it aims to become fully decentralized where it would eventually require decentralized nodes to stake its native token, Nectar[5], which market makers would be able to receive as a reward for filling order books and holders would use to decide the future of the platform.

Other prominent exchanges still in production

Binance’s CEO, Changpeng Zhao, stated, “I believe that decentralized exchange is the future…” and is putting the weight of the biggest centralized exchange[6] and its team behind his DEX– Binance Chain. Binance Chain, an initiative announced in March 2018[7], aims to create a faster and more efficient DEX that has liquid order books whilst also being user friendly — just like Binance, the centralized exchange. A beta can be expected end of this year or early 2019[8].

Bithumb one of the largest exchanges in South Korea and 6th overall, in aspirations similar to the ones exhibited by other centralized exchanges, aims to launch its decentralized exchange by early 2019. This is in its bid to obtain more exposure to overseas markets[9].

Conclusion

There is a plethora of opportunities, as seen above, that decentralized exchanges enable for the upcoming decentralized ecosystem. It is encouraging to see that the sentiment is shared by incumbents whom this new category of exchanges was attempting to disrupt. Their move ascertains that heavier investments and more attention is given to this nascent type of technology, which all the more brings us closer to realizing our decentralization dreams.