The Importance of Decentralized Exchanges: Influence-Free Trading
“How much is the decentralized approach to crypto really worth if exchanges can exercise central power over trading?”
The ILCOIN Development Team has been emphasizing the importance of the correct and realistic way of interpreting the decentralized approach. The general perception that codes — fully open-source codes — are accessible to anyone is obviously right. Therefore, the role of central control is not feasible. However, it is not that simple because the practical utilization of cryptocurrencies is made up of a lot more components than simply the possibility to connect freely to open source.
I have already explained in my previous interviews and Medium articles that free block generation, the running of nodes, and the decentralized access to data do not necessarily materialize at the same degree of freedom. In other words, decentralization is distorted in every case where access is restricted. One of the best examples of this is the mining of Bitcoin. Although anyone can mine, as the difficulty increases, mining becomes more and more centralized due to increasing costs. Of course, this example is not the absolute justification that Bitcoin would be centralized, but it still dims the “raison d’être” of the idealistic approach.
Apart from block generation and transaction operation, one of the most interesting matters is blockchain-based data storage. The point of the off-chain approach is that the data does not get stored within the block — given its high costs — but rather outside of it. In this case, transparency is ensured by the records associated with the data and which records appear to every participant in the network when running the nodes. However, data that actually gets stored will not be available to everyone. The only question is whether we can, in this case, rightfully call this system decentralized. According to our approach, the answer is “no”. Clearly, this approach can be debated, but it must be seen that data which is not within the blockchain cannot be considered absolutely transparent. Nevertheless, the off-chain approach has its own place and value too, but one must see how it is different from its on-chain based counterpart.
I believe that the cases mentioned above do not affect crypto-market conditions to the same extent that exchanges do. This is because even though we have a decentralized Ethereum or Bitcoin, what is it worth if we can only realize our business opportunities within the framework of a third party’s subjectively central regulation. In other words, decentralized cryptocurrency in a centralized system will turn into the same money as the operation of the banking system or any other regulators. Obviously, the essence of the decentralized approach would be to completely eliminate the possibility of third-party influence in the processes. The challenges that may accompany doing this is a different question to which only innovative solutions of the technology can provide reassuring answers.
Of course, the decentralized approach is not relevant to everything. Therefore, I would like to ask you not to parallel my particular way of thinking with traditional stock market trading. Also, after reading these lines, I wouldn’t want anyone to think that the cryptocurrency market would be better without any form of regulation. This is not the case. Instead, it is more about problems in the approach that has developed about decentralization — it is distorted and subjective in many instances.
How does decentralization make any sense if the coin or token that I am using could become manipulated, alienated, or restricted by a third party? Exchanges do play a key role, and in many cases, this role does not fit into the decentralized approach. Power play — along with manipulating and possibly utilizing cryptocurrency-related information — is pretty far from the social and economic perception associated with decentralization. With that being said, it does not mean that each and every one of the centralized exchanges is vicious. However, it does mean that many of them often tend to misuse and abuse their position.
The number of exchanges is infinite, but as many articles have previously elaborated, their actual trading volume is considerably less than what the listing sites indicate. However, this is only a smaller portion of the problem. The larger problem lies within the subjectivity of exchanges, which may only be solved by DEXs (Decentralized Exchanges). DEXs are the future of open-source cryptocurrencies. These exchanges are able to set the crypto market off on the journey of actual development. Therefore, Ethereum is playing a significant role in the processes now. Smart contract developments aren’t perfect just yet, but this matter is continually changing as many projects are working on implementing the best possible solutions.
As for me, I am very optimistic about the spread of DEXs, and I hope that Ethereum will be able to provide DEXs with a proper foundation and to operate stably despite the increasing number of projects. Needless to say, it is no coincidence that we are building our DCB-related smart contract system on Solidity, as we do believe that developing on Ethereum will pay off. This does not mean that we are giving up our SHA256-based PoW system, but it does signify that we are looking at certain processes through global lenses, and this approach also includes the importance of striving for efficiency.