January 14, 2023 | BY OSMAN BAH (The Advisor)
Is Total Decentralization A Step Towards The Right Direction?
Cryptocurrency brought about the age of anonymous transactions. People can make exchanges freely through the blockchain. This ease of buying cryptocurrency through direct, peer-to-peer transactions on an online platform without a middleman was possible with a decentralized exchange (DEX). DEXs are trustless, which means that users' funds and personal data are properly protected. Users of decentralized exchanges can access a DEX quickly and securely without having to register for an account on the exchange, go through identity verification, or divulge any personal information. It is different from a conventional centralized exchange, where a typical transaction involves a third-party entity such as a bank, another trading platform, or government entity and manages the security and transfer of assets between two parties while it takes custody of user funds.
Instead of using centralized platforms, DEXs employ algorithms to find and move transactions among individual users. The transactions on DEXs were documented with the aid of smart contracts and Automated Market Makers (AMM). DEXs provided decentralization by substituting an algorithm for the centralized structure. Nevertheless, despite the advantages of decentralization, a fully decentralized paradigm is inefficient.
The Issue of Liquidity
The liquidity of decentralized exchanges is affected by a wide range of additional issues. Due to regulatory deficiencies, decentralized exchanges struggle more than CEXs when dealing with large investors. In terms of liquidity, smaller, more recent DEXs fall short of the scale and experience of big, centralized exchanges. Due to worries about unusual additional expenses or slippage, decentralized exchanges are inappropriate for large orders without the desired liquidity. The issues with liquidity on decentralized exchanges, however, are rapidly being addressed by new aggregator and compliance mechanisms. Biokript is partnered with Yellow Network, which is an aggregator that helps provide sufficient liquidity to its platform.
The Issue Of Impermanent Loss
Decentralized exchanges have made efforts in solving their liquidity problems. Many DEX use liquidity pools that implement Automated Market Makers. AMMs are algorithms that follow a term called the constant product rule. This simply means that no matter the asset in the pool, the total value should always remain the same. Unfortunately, this exposes liquidity providers to something called impermanent loss. Instead of the number of tokens they invested in the liquidity pool, liquidity providers can only withdraw their portion of its value.
Along with the fulfillment of trades, the ratio of various crypto assets in the liquidity pool of DEXs fluctuates often. This allows the liquidity pool to respond to the current state of the market by adding more tokens that are depreciating in value. Liquidity providers must then withdraw more tokens that will depreciate in value.
The Issue of Unvetted Tokens
Given that there is no central authority in a DEX, it is extremely simple for some of those trash tokens or coins to end up in the listings. The crypto industry is plagued with frauds and worthless tokens. It is unfortunate to say that w hat is listed on most DEX has little to no verification process.
Decentralization is the aim of cryptocurrency, yet there should be common ground that allows trust and balance. In order to achieve a cohesive trading environment, Biokript provides the solution of a hybrid approach. By combining features from both centralized and decentralized exchanges, it is able to provide the best trading experience to its users.