Why Have Decentralized Exchanges Failed in 2018?

One of the most important developments in the cryptocurrency space is the implementation of the decentralized exchange. Decentralized exchanges will allow users to trade cryptocurrencies peer-to-peer without relying upon a third party such as Coinbase or Binance. Centralized exchanges are effective and have optimal user interfaces, but they are also massive targets for hackers. Additionally, centralized exchanges are vulnerable to harsh government regulation or even a shut down in radical instances. Bitshares was the first decentralized exchange created in 2013 by Dan Larimer of EOS. Bitshares was created as a response to the central vulnerabilities of the Mt Gox exchange. Throughout 2013 – 2014 Mt Gox was handling over 70% of all Bitcoin transactions as the world’s largest Bitcoin intermediary. Mt Gox’s market dominance made it a prime target for hackers and in 2014 Mt Gox suspended trading and filed for bankruptcy. Over 850,000 bitcoins belonging to customers and the exchange were lost.

When it comes to regulation, governments cannot effectively ban the usage of cryptocurrencies, but they can shut down centralized exchanges and create obstacles which make it difficult for citizens to acquire cryptocurrencies. Decentralized exchanges are essential because they have the ability to disrupt the existing power structures such as Coinbase or Binance. As long as fiat exists there will always be a use case for centralized exchanges because they provide a fiat-to-crypto gateway which is not compatible with decentralized exchanges. The disruption coming from decentralized exchanges will change the ways in which many exchanges do business. Binance, the world’s largest cryptocurrency exchange, is already preparing for this disruption by creating a decentralized exchange of their own.

Although Dexes are essential for a decentralized future, they have been very unsuccessful when it comes to on-boarding new users in 2018. If the technology is available, what are the key reasons why decentralized exchanges have failed to become popular?

First: the user interface problem. UI is the most important feature when it comes to on-boarding new users. This is the primary reason why Coinbase exchange became one of the most popular entities in the space. Individuals who are new to cryptocurrency need to feel comfortable when buying Bitcoin for the first time. Often it is very intimidating for users when they look at a decentralized exchange for the first time. Developers who have created decentralized exchanges are highly skilled and passionate about decentralization, but so far they have failed to create optimal user interfaces. This has led many people to use a friendlier centralized entity such as Coinbase. Typically, a new user will leave their Bitcoin in Coinbase’s wallet, for which they don’t own their private keys, and ultimately they have no control over their Bitcoin’s security.

Secondly, decentralized exchanges are slow and they do not have sufficient liquidity. Sometimes it may take hours for an order to fill, especially when a user is attempting to trade a random ERC20 token.

Thirdly, most decentralized exchanges have limited trading pairs and no customer support. A user has to be responsible for holding their private keys and remembering their password, otherwise their funds will be permanently lost. With all of these factors in place it is obvious why individuals are not using decentralized exchanges.

It will be interesting to see how successful Binance’s Decentralized exchange may become. If Binance can succeed in creating the most popular decentralized exchange it will be a momentous event that could shift the direction of the existing power structures within the space.

Disclaimer: I am not a financial advisor. This is not financial advice. Please do your research independently and make objective decisions. This article is intended to educate readers on the recent state of the cryptocurrency market. The author of the article trades cryptocurrency.