The Importance of Decentralized Cryptocurrency Exchanges
Decentralized exchanges, such as Uniswap and 1inch, have exploded in popularity within the past year. Their user interfaces are extremely easy to understand and use and have attracted billions of dollars in volume. Their decentralized nature is what makes them so valuable. 100% uptime, the inability to halt trading, provide liquidity and no identity verification process are their main benefits. They are the future of trading cryptocurrencies and are surpassing centralized exchanges like Coinbase, Robinhood and Kraken in usage and volume.
100% uptime
Due to the fact that decentralized exchanges run on top of blockchains, almost all of which are on ethereum, there is no downtime. Instead of being in one central location with a room of servers, a blockchain is a distributed computing network spread out geographically around the world. With a blockchain, nodes can go offline and the network will run without a hiccup. This is in contrast to a centralized location with a room of servers where if these servers go down, the exchange is unusable. Blockchains eliminate a single point of failure and is why decentralized exchanges have 100% uptime.
Trading cannot be restricted
Due to the ethereum blockchain being a geographically distributed computing network, it is not controlled by any one entity. Rather, it is an unstoppable server whereby applications, such as exchanges, can be built upon. Therefore, no one can restrict them from operating or anyone from trading on them. It is a truly free market.
The recent Gamestop short squeeze debacle raised a number of questions regarding the power of centralized exchanges such as Robinhood. They restricted the trading of Gamestop and other stocks for retail investors because they were, for once, beating the behemoths of Wall Street. It was a joyous occasion for the little guy and I watched from the sidelines in glee as the chaos unfolded. Gamestop surged so much that Robinhood had to stop trading to save the massive Wall Street hedge funds from total loss. If you ask me, these restrictions are complete bullshit and should not be allowed to happen. What ever happened to the idea of a free market? Oh ya, we don’t have one. This is why decentralized exchanges are so desperately needed so that anyone and everyone can trade whatever, whenever and however much they please i.e. a free market. Welcome to cryptocurrency aka financial freedom.
Providing liquidity
Another great feature of these exchanges is that the users provide the liquidity. In other words, you can be a market maker providing people with the ability to utilize the liquidity you provide on each side of the order book. You then earn a portion of the trading fees based on the percentage of the liquidity you are providing to the entire liquidity pool.
So let’s say you have $500 in ethereum and $500 in chainlink. You would be able to be a market maker in the ETH/LINK liquidity pool and receive a percentage of the trading fees based on how much liquidity you are providing. Notice you have to have an equal amount of each token to be able to provide liquidity. So if there was a total of $5,000 in ETH and $5,000 in LINK in the pool, you would get 10% of the trading fees. If a trader wants to trade their ETH for LINK, they have access to $10,000 in total ETH/LINK liquidity to trade with.
When you provide liquidity to a pool, you receive “LP” tokens or liquidity pool tokens representative of your portion of the pool. You can then stake, or lock up, these tokens on liquidity mining platforms and earn for staking. This is also called yield farming. You are rewarded for showing your dedication for the tokens you are providing liquidity for. It is an innovative way to distribute tokens to loyal believers in a project. Returns can be upwards of 100% APY, no joke. It is not without risk, however, this is for another article.
No identity verification process
That’s right. Decentralized exchanges, such as Uniswap and 1inch, do not require any personal identity information. You simply need a browser wallet or hardware wallet with funds on it and you may begin trading. It’s a beautiful thing once you experience it. You can finally freely move and trade your money as you please and no one can restrict nor knows who is doing it. This is what is called “decentralized finance” or DeFi. Everyone and anyone from any part of the world can use these exchanges with no downtime, trading restrictions or identity documents needed.
Ok, so what’s the catch?
As with anything, there is always something that isn’t so favorable. Ethereum fees are quite high right now due to increased network traffic. To trade on these platforms, it may cost you $15–$25 per trade. At some times, it may be less, but in most cases, it will be in that range. I don’t mind it because of the financial freedom I am getting. I would rather pay more to freely do what I wish with my money than not pay a fee, not be able to move my money and have to give up personal identity info, like Robinhood.
Conclusion
Decentralized exchanges are the future. They have 100% uptime, no restrictions, enable users to provide liquidity and require no sensitive identity information. The restrictions Robinhood put on traders is a testament as to how unfree of a market the stock market really is and how desperately decentralized exchanges are needed.
neuroboy
