A Comprehensive Comparison of Four Decentralized Exchanges
To date, over $1.3 billion have been stolen from centralized exchanged hacks. Hacks occur because centralized institutions hold the private keys of its users. With this knowledge, hackers only need to compromise the system of the exchange to access the private keys. They can then send stolen cryptocurrencies worth tens of millions of dollars to their preferred wallet destination. This glaring security weakness is a risk that most traders and investors take when buying and selling cryptocurrencies.
Enter decentralized exchanges (DEX).
Decentralized exchanges solve this security problem by eliminating the third-party service provider (centralized exchange) to facilitate the trade. Instead, trades occur directly between users through a peer-to-peer system. Without the need to deposit funds to a centralized exchange, users control their funds and their private keys all the time. Under this system, hackers need to compromise the system of thousands, if not millions of users, to steal millions of dollars worth of cryptocurrencies. That’s just not worth the effort.
DEX appears to be the magic bullet that can solve security problems and possibly pave the way for mass adoption. The promising potential of a DEX motivated us to look into Binance DEX, Resistance DEX, eFin, and Bisq to see what the future may hold. We analyzed each dex and made comparisons using these criteria:
- User Experience
- Trading Pairs
In this article, we provide a comprehensive comparison of these four decentralized exchanges.
This feature is crucial because it determines the amount of effort required for a new trader to learn or get a feel of the interface of the DEX. The lower the effort, the higher the chances of retaining the user.
Binance DEX features the same user interface as Binance.com. It also integrates TradingView charts. On top of that, users have the option to create wallets and keep their own private keys. If that’s not secure enough for you, Binance DEX also incorporates software and hardware wallets such as the Ledger Nano S and Trust Wallet.
Binance Dex interface
Overall, Binance Dex is suitable for experienced traders. New traders can consult the interface guide to facilitate the learning process.
ResDEX caters to the novice user. Users need to first download the ResDEX client before they can begin trading. Once the platform is open, they can easily choose which coins to trade. They can even buy Bitcoin (BTC) or Ethereum (ETH) with their Visa credit card.
Users also have access to an integrated wallet where they have control of their private keys. In addition, users can enable enhanced privacy to keep transactions anonymous.
While ResDEX has an intuitive interface, the downside is that users need to be in front of their desktop machine to trade.
Bisq also caters to the novice user. Just like ResDEX, you need to download the desktop client to begin trading. It also comes with a special wallet where you control the private keys.
Among the four decentralized exchanges covered in this article, Bisq offers the most basic interface. It is very easy to navigate because it comes with limited features.
eFin’s user interface may be complex but it is easier to navigate than the interface of Binance DEX. Experienced traders will have no problem using eFin because it mirrors most trading platforms. There might be some learning curve for new users but it is not as overwhelming as Binance DEX.
Traders maintaining control of their private keys is only one of the aspect of DEX security. Another big issue is front-running. This occurs when someone else can insert orders ahead of pending orders.
Miners plugged into the blockchain can manipulate prices in their favor by inserting orders while a pending order awaits block confirmation. Big players can also frontrun others by spending more gas or tokens so miners prioritize their trades. These situations put retail investors at a disadvantage. Let’s see how the four DEX address front-running and other security concerns.
The Binance Chain technology is the cream of the crop as it provides one-second block times with virtually instantaneous transactions. This leaves front-runners very little room to react before orders are executed. It also utilizes the Proof-of-Stake system where validators have an interest in keeping transactions honest. Otherwise, there’s risk of losing their stake. Also, Binance DEX implements several other measures to combat front-running.
ResDEX relies on InstantSwaps to combat front-running. This feature allows trades to be executed in less than a minute without waiting for block confirmations. To do this, users must deposit a certain amount of RES (native gas/token) as collateral.
The amount of RES deposited corresponds to the amount of Bitcoin that a user can trade. For instance, if you deposit 100,000 RES with a market value of 1 BTC, you can trade less than 1 BTC without waiting for block confirmations. This system increases the trading speed on ResDEX while minimizing the window for front-runners to react.
Bisq protects user transactions by employing three basic measures. When an offer to buy or sell is matched, an escrow transaction requires 2-of-3 multi-signature addresses. Both parties must sign the transaction before the escrow is unlocked. This usually happens when one user confirms the payment of fiat currency while the other user confirms receipt of payment.
The second measure is the implementation of security deposits. The security deposit is a flat 0.1 BTC or 1000 BSQ regardless of the size of the trade. The security deposits help ensure that both parties hold up their end of the trade. Lasty, Bisq also has an arbitration system to settle disputes.
With this system of locking funds in escrow, frontrunning is never an issue. As long as there’s no dispute, both parties will receive the funds as agreed. The downside is that trades can take time and users go through the hassle of depositing funds for escrow before trading.
eFin solves the two issues (transaction speed and escrow deposit) faced by Bisq users with the implementation of the Multi-signature Transaction Engine (MTE).
Just like Bisq, the MTE requires the signatures of two participants before the shared wallet is unlocked. Once funds are unlocked, the data is published on the eFin blockchain, which facilitates the trade by using features such as Atomic Swaps or RSK Smart Contracts. These features provide near-instant transaction times. This mechanism solves the slow transaction speed that plagues Bisq users.
To ensure that both parties hold up their end, eFin uses Hash Time-Lock Contracts (HLTC). With this measure, the receiving party is given a specific amount of time to accept payment. Otherwise, the cryptocurrency or fiat currency is returned to the sender. With HLTC, users don’t have to shell out security deposits.
Liquidity is another problem that prevents existing decentralized exchanges from attracting users. A DEX is as good as dead if trading activity is anemic. Let’s see how our four DEX candidates handle this issue.
Binance (centralized) is the largest cryptocurrency exchange in terms of volume with an average daily trading volume of $664.4 million. They also have an average of 313,000 daily active users to put them in second place in this category just behind CoinBase.
Binance at number two
Therefore, Binance can leverage these numbers to provide liquidity on Binance DEX. It is not difficult to imagine that they will incentivize market makers as well as their big user base to keep trading volume on the DEX healthy.
Unlike Binance, ResDEX doesn’t have a huge liquidity pool to rely on. So, they partnered with someone who does. They signed a contract with Huobi; the company agreed to provide liquidity on ResDEX.
Unfortunately, Bisq has very little to offer in terms of liquidity. There’s little to no trading activity on the platform. In fact, Bisq has an average of 52 trades per day according to March 2019 numbers. So far, Bisq offers no real solution to boost its liquidity pool.
eFin provides a two-pronged approach to combat liquidity issues. The first method is to motivate users to stake, store, and trade their cryptocurrencies on eFin by providing incentives through a distributed rewards system. The second approach is to integrate order books with other decentralized exchanges. The idea is to create one massive decentralized exchange that helps users find a suitable trade as fast as possible.
One last issue that can possibly hinder the success of a DEX is the breadth of pairs available for trade. Those with the highest number of listed trading pairs have the best chance of attracting more users.
Binance DEX is currently on its test phase and the exchange is yet to list any trading pairs on the web-based platform other than trial “token”/BNB pairs. There’s also no official announcement as to the exact number of trading pairs that will be listed on this DEX. However, Binance has a reputation for aggressively listing tokens. Also, their centralized Binance exchange has 463 trading pairs and 150 coins. They can easily leverage their dominance to list a good number of trading pairs on their DEX.
With the implementation of atomic swaps, ResDEX enables users to trade as much as 95% of existing cryptocurrencies. On top of that, the partnership with Huobi provides the liquidity, which allows users to trade more than 300 cryptocurrencies on ResDEX.
On Bisq, you can only buy and sell BTC using fiat currency or altcoins. However, the availability of trading pairs depends on existing offers. Since liquidity is poor, chances of finding your preferred trading pair is extremely low. You can post an offer but there’s no guarantee that someone will take on your ask.
Offers on Bisq
On eFin, users have the option to buy and sell TRON (TRX), TokenPay (TPAY), Litecoin (LTC), Ripple (XRP), Bitcoin (BTC), Ethereum (ETH), eFin (EFIN), stablecoins, and ERC-20 tokens.
Cryptocurrencies available on eFin
Decentralized exchanges can be the magic bullet that solves security issues plaguing centralized institutions. It can also pave the way for mass adoption. By looking at the user interface, security, liquidity, and trading pairs of four decentralized exchanges, we can say that we are now closer to manifesting Satoshi Nakamoto’s vision of a decentralized, peer-to-peer electronic cash system.
Disclaimer: The writer owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.