The views expressed here are the author’s own and do not necessarily represent the views of Cointelegraph.com.
For an economy that emphasizes decentralization, cryptocurrency has ironically relied primarily on centralized platforms of exchange[1]. This is problematic as they often hold funds in giant “honeypot” addresses that attract sophisticated attackers. This has resulted in several cases where exchange funds have been drained. In fact, there were two in the past 3 months alone! Bitgrail reported on Feb.12 that over $170 mln in XRB[2] was stolen from their wallets. Coincheck suffered one of the largest losses ever with over $400 mln in NEM[3] being stolen.
Decentralized Exchanges
Fortunately, alternative solutions to centralized exchanges are available and are called decentralized exchanges (DEXs). These platforms are structured in such a way that users retain ownership of their coins with their private keys. This is a much-needed solution because it prevents cryptocurrencies from being accumulated into one centralized point of attack.
The demand for DEXs are growing. For example, the Radar Relay exchange exceeded $1 mln in volume[4] over a 24 hour period for the first time back in the beginning of January.
But even this type of exchange is not without its limitations - they are liquid and front-running.
Liquidity
The way decentralized exchanges work is that people individually set and take orders. However, these orders exist on separate order books that are hosted independently of each other. Therefore, the orders placed on one book won’t appear on another. This creates an issue as users suffer from a lack of liquidity and may have to look at several different books to place their orders.
This can be fairly solved through a process called
