Registrations, Know Your Customer (KYC) requirements, deposit times, deposit fees, withdrawal fees, withdrawal times, withdrawal limits, server downtimes and server maintenance periods are just some of the problems traders face every day when trying to trade cryptocurrencies.
I haven’t even started to mention the worst of them all: Exchange hacks.
These problems can be very frustrating to experienced traders so I can only imagine how frustrating they may be to noobies that have just entered the space. These guys would constantly be worrying if they are doing everything correctly and if their funds are indeed safe.
Well, luckily, there is a strong solution to all of these problems in the provisions made by Decentralized Exchange (DEX) protocols.
In this article, I will try to explain why investing in some DEX protocols today might be one of the most profitable ventures you take on as a trader. These protocols have already laid the groundwork for traders to be able to exchange cryptocurrencies in a trustless and decentralized manner.
However, there is still much work to be done on DEX’s as they continue to improve their infrastructure before the herd starts to use them as their main source of trading.
This provides a solid opportunity to get involved before they become the first choice for traders to trade with.
Let me start at the beginning and explain the problem with our exchange infrastructure today.
Centralized Exchanges: Trading Decentralized Money Through 3rd Parties
You see, when you sign up to a centralized exchange such as Kraken or Binance, you are pretty much trusting your hard-earned decentralized money in the hands of a centralized exchange.
To trade on these centralized services, you have to first register with the exchange and then pass KYC procedures to even start trading. Sometimes, these KYC procedures can take days (or even weeks) which leaves many new traders frustrated as to why they cannot buy their chosen cryptocurrency today at the prices that they had in mind.
After handing all of the rights to your anonymity, by providing every single bit of identification that you have on hand, and finally manage to pass the KYC the next step you have to do is make a deposit onto the exchange.
The problem with this is the fact that once you send over that BTC transaction (or whichever deposit cryptocurrency you choose) you are basically signing over your cryptocurrency to this centralized exchange and are trusting them to keep your funds safe. You probably don’t even understand the security measures that these exchanges use to keep your coins safe and even if you did, you could never verify that they are actually doing what they say.
Anyhow, after waiting for a bunch of confirmations for your deposit to be confirmed, which can sometimes take hours, you are ready to place your first trade. But after placing your first trade, you realize that there are trading fees that you have to pay - each and every time you place a trade - up to 0.25% per trade (sometimes more!) These can start to add up if you are placing many trades per week.
Now you are ready to make a withdrawal so you can take your own money back into your own wallet. But wait, there are fees again! On top of that, there are daily withdrawal limits so you cannot even withdraw your entire portfolio in one day if you are over the threshold. Even after executing the withdrawal, you have to wait for some confirmation on the blockchain again before you receive your funds.
I thought this was meant to be decentralized money?
Although centralized exchanges have provided the industry with a great starting point to buy and exchange cryptocurrencies, you can start to see how these problems can easily start to add up.
And I haven’t even mentioned any exchange hacks just yet!
I only really need to mention the major Mt Gox exchange hack in March of 2015 when over 850,000 BTC were wiped from user accounts on the centralized Mt Gox exchange. This was the first time a significant amount of Cryptocurrency was stolen from an exchange and it sent waves of fear throughout the entire industry.
This wasn’t the only large-scale hack. Following is a short list of some other hacks in which user funds were stolen from these centralized services;
- Cryptsy - July 2015 - 13,000 BTC & 300,000 LTC
- Bitstamp - January 2016 - 19,000 BTC
- BitFinex - August 2016 - 120,000 BTC
- Cryptopia - January 2019 - 1,675 ETH
- Binance - May 2019 - 7,000 BTC
- UpBit - November 2019 - 342,000 ETH
Do you notice something about the list above?
Yes, that is right - Pretty much ALL of the largest cryptocurrency exchanges in the world have been subjected to hacks at one point in time. Although these large-scale exchanges can afford to refund their users, it still causes a certain level of uncertainty regarding how safe your cryptocurrency really is on these exchanges.
We can only assume that as cryptocurrency continues to grow, hackers will also continue to target the wallets (and user funds) of these centralized services.
The ONLY Way To Curb These Problems: Decentralized Exchanges
Decentralized Exchanges are pretty much the only way to stop any of these problems from occurring. DEXs come with some major benefits but the most prominent of them all is the fact that they are non-custodial. This means that YOU are in charge of YOUR coins and never have to deposit them in any form of 3rd party wallet that is out of your control.
In addition to this, DEXs require no KYC procedures so your anonymity is upheld. Furthermore, due to the nature of the DEX protocols, which I will discuss below, trading on these DEXs can be VERY cheap.
Decentralized Exchanges are a product of the ever-growing Decentralized Finance (DeFi) space in the industry.
Even Coinbase, one of the world’s largest cryptocurrency exchanges, recognizes the extreme importance that DeFi will be playing in the future of cryptocurrencies. In 2019, the exchange announced the launch of its USDC Bootstrap Fund in which they will be investing USDC (a stablecoin) into the protocols of DeFi to provide liquidity to the service in the hopes to support the development of DeFi protocols.
It did not stop there for Coinbase.
In March 2020, they announced that users can now lend out their cryptocurrency on their Coinbase Wallet App and earn interest through DeFi protocols such as DyDx and Compound Finance. Users can use the in-built dApp browser on the wallet and choose the best options for them to earn interest by lending their cryptocurrency.
So, if the largest centralized exchanges are becoming heavily invested in the Defi space and DEX protocols, you should also start paying attention!
Which DEX Protocols Can We Invest In?
There are already a bunch of Decentralized Exchange protocols that are up and running with the ability for you to invest within. However, firstly it is important to understand the difference between DEX protocols and DEXs themselves.
The following 3 DEX protocols are the underlying mechanisms that allow Decentralized Exchanges to function. Developers use the following protocols to come and build their own DEX on top of. So, you are not investing in individual DEXs, instead, you are investing in the entire underlying protocols that the DEXs are built on top of.
To gain a better understanding, you can think of investing in these protocols kind of like investing in the Google Play Store itself. Applications on the Google Play Store go up and down in popularity, however, the underlying Google Play Store layer (in this case the DEX protocol) will continue to prevail as it acts as the foundation for the entire ecosystem.
1. 0x Protocol
0x is an open DEX protocol that enables peer-to-peer transactions of different assets on the Ethereum blockchain. It was created by Amir Bandeali and Will Warren in 2016 and went on to raise over $24 million in their 2017 ICO.
The key thing that 0x has implemented a system in which order matching is taken off-chain which reduces the GAS fees that traders have to pay and removes blockchain bloat from the network as the majority of the processes are conducted off-chain through the State Channels and Automated Market Makers.
At the heart of the 0x protocol is the ZRX token itself. ZRX has many use cases but the main one is the fact that it is used to pay Relayers for matching orders. The Relayers are basically the 3rd parties that build the DEX on top of the core protocol who host off-chain order books and charge fees once orders are matched. This fee will be paid in ZRX.
You can take a look at this list of the many Relayers that have already built on top of the 0x protocol itself.
The second reason that people hold ZRX is the fact that it gives voting rights into the protocols' governance process. This means that ZRX holders are owners in the protocol and can actually have a say on the direction they would like to see the project head toward.
You only need to look at the 1-year history of the volume on 0x to get a sense of how quickly the protocol is growing;
Looking at the graph above, we can see that the volume of trades conducted on the 0x protocol itself started to breach the $10 million per week level during February 2020. In one week during March 2020, it reached as high as $38 million! On top of this, the fees per week are now also breaching the $2,500 per week level which is being paid out to Relayers.
Furthermore, we see a similar picture if we are to look at the number of trades per week;
We can see that since late November 2019, the number of trades per week on the 0x protocol has been substantially increasing. It is hitting almost 20,000 trades per week during 2020 and once has reached a peak of over 40,000 trades in one week during late 2019.
These figures show that the 0x protocol is actually starting to gain some solid traction, providing the perfect time to grab some ZRX.
Loopring aims to become the new crypto trading standard by creating a decentralized exchange protocol. The great thing about Loopring is the fact that it shares liquidity across all of the DEXs that are built on top of its protocol which greatly enhances the opportunities for traders.
It was founded by Daniel Wang and Jay Zhou in China and it launched in 2017.
The team has developed a great feature to enhance the trading throughput on their system.
This feature is known as zKRollups which allows transactions to be grouped together off-chain in order to be processed in one batch. This greatly increases the throughput and it also reduces the cost of trading on the exchanges powered by Loopring significantly.
In fact, trades on Loopring DEX Protocol can cost as little as $0.000042 per trade! Although traders won’t see such low fees, it does give room for DEX owners to offer significantly lower fees than traditional exchanges.
With zKRollups, Loopring can actually facilitate up to 2,000 traders per second whilst guaranteeing the security of the underlying Ethereum blockchain.
At the heart of the entire ecosystem lies the LRC token. LRC token holders can stake their tokens to secure the network and earn up to 70% of the protocol fees that arise from all exchanges on the DEX protocol.
Furthermore, DEX owners must hold a certain amount of LRC to keep their DEX open.
Additionally, the team at Loopring have actually launched their very own DEX, Loopring.io, where you can go now and start trading.
Owning LRC provides a fantastic opportunity to be part of a growing protocol in the Loopring ecosystem.
3. Kyber Network
Last, but not least, is the Kyber Protocol. The Kyber Network is an on-chain liquidity protocol that allows users to swap digital assets on a peer-to-peer basis. It was founded in 2017 and managed to raise over $60 million in its ICO.
It was intended to be a decentralized version of ShapeShift providing a very easy to use platform for users to be able to come and swap their tokens in a decentralized manner.
The protocol even allows users to swap ETH with Wrapped Bitcoin (WBTC) as well as other ERC-20 tokens.
The most important thing about the Kyber Network is the fact that it can be easily integrated into any dApp to facilitate an instant exchange of value between users in the ecosystem. This means that developers can easily take the Kyber protocol and build different DeFi solutions without having to worry about creating the underlying infrastructure - allowing them to solely focus on improving their dApp.
Furthermore, the Kyber protocol has been gaining some serious traction in recent months. If we take a look at the year-long volume stats below, we can see that the network has been growing since February 2020 as it started to process over $3 million on a regular basis;
We can see that during its peak, it was transacting as much as $28 million in a single day! This proves that people are already starting to realize how important this DeFi solution will be on the entire industry as a whole.
Investing in some KNC right now will provide a great opportunity to get in early before KNC truly takes off as Kyber Network plays a more important role in decentralized finance.
So, why would investing in DEX protocols now be very profitable?
Firstly, as you can see on the charts I’ve included in the article, the DEX ecosystem is starting to gain some serious traction. DEX protocols are still at the stage of being a small snowball that just started to roll down the mountain.
Secondly, currently, most crypto users are trading decentralized money on centralized exchanges.
It shouldn’t be like this.
Once the true power of DeFi emerges, it is inevitable that these DEX protocols will see growth as the crowds start to use them.
However, DEX technology is still not mature yet to compete with centralized exchanges.
Ultimately, it's not a matter of IF, but WHEN DEX will power the way we exchange cryptocurrencies.
So, the logical step is to invest in these protocols now, before they really start to gain some solid traction.