Stop CEX, use a DEX
How Tokenized Crypto on a Decentralized Exchange Solves the Problems of Centralized Exchanges
Are you tired of worrying about the safety and security of your assets on centralized crypto exchanges? Do you want to trade without worrying about unfair practices or the potential collapse of the exchange?
This article shows how tokenized crypto on decentralized exchanges (DEXs) can offer a solution.
The Vulnerabilities of Centralized Crypto Exchanges
The recent failure of FTX illustrates the risks of using centralized exchanges, which have become like crypto banks. These platforms require users to trust that they hold enough assets to cover deposits and offer fair trading. However, this trust is often misplaced. Centralized exchanges are vulnerable to collapse because their deposits are not always backed by sufficient assets.
1. The Transparency Problem: Liabilities versus Assets
It is difficult to compare the liabilities of a crypto exchange with its assets because there is no way to know how much crypto is owed to users. This makes it impossible to determine if the exchange holds enough assets to cover its liabilities.
2. The Trust Issue: Fair and Unbiased Trading
Additionally, trading on a centralized exchange is centralized by nature. This means that users must trust the exchange not to engage in practices like front-running its customers.
Luckily, both of these problems can be solved with tokenized crypto on a DEX.
Solving the transparancy problem by tokenizing crypto
Tokenized crypto is a way of representing crypto assets on another blockchain. For example, if you give me a Bitcoin, I could issue you a token that represents a claim on that Bitcoin. You, or anyone else who holds that token, could then use it to redeem the underlying Bitcoin that I am storing.
But why would someone tokenize Bitcoin you might ask. Tokenizing it, allows users to trade and transfer these assets on another blockchain. This blockchain might offer functionality that the native blockchain does not. For example tokenized Bitcoin on Ethereum allows you to use it in smart contracts.
One of the key advantages of tokenized crypto is that it clearly and publicly shows the amount of liabilities that have been issued. This is determined by the amount of tokens that have been issued, and makes it easy to compare the amount of issued tokens to the amount of assets held by the issuer of the tokenized crypto. This provides greater transparency and accountability for these assets.
If we compare tokenized crypto with deposits on centralized exchanges, we can see that both are a promise to pay back the crypto that has been deposited. The difference is that with tokenized crypto the total amount of promises is publicly stated on a blockchain in the form of tokens.
Solving the trust issue by trading on a DEX
If the tokenized crypto is issued on a decentralized exchange, these tokens can be traded in a decentralized manner. This solves the problem of centralized trading, as users do not have to trust the exchange not to front-run them.
Because all trading is settled on a blockchain, fees can be high and transaction times can be slow. Additionally, centralized exchanges provide convenient ways to deposit and withdraw fiat, which is not always possible on a DEX.
The future of trading on a DEX
Not all DEX’s have these problems though. For example, the Stellar network has an onchain decentralized exchange (DEX) that offers near-zero fees and fast transaction times. In addition, it has implemented standards that allow users to easily convert between fiat and crypto, as well as deposit and withdraw cash. This combination allows entrepreneurs to build an almost identical frontend experience compared to centralized exchanges, without the inherit trust issues.
To try out the Stellar network, you can use one of its frontend interfaces to the DEX, such as StellarX, Stellarport, or Lumenswap. These interfaces make it easy to trade tokenized crypto on the Stellar network. You’ll do so from your own wallet, where you own your own keys.
What do we need for increased adoption of tokenized crypto on DEXs?
We didn’t get this far to end up with the next generation banks, right? In order for tokenized crypto on DEXs to become more widely adopted, there are a few key things that need to happen. First, there needs to be a greater number of tokenized crypto assets available on DEXs. This will give users more options for trading and investing, which will in turn drive more adoption of these platforms.
Second, there needs to be clearer regulation and industry standards around the obligation for issuers of tokenized crypto to back their tokens with assets. If there are exemptions, it should be clear when and how there might not be a 1:1 ration. This will provide greater transparency and accountability for these assets, which will help to build trust with users.
Third, the interfaces for DEXs need to be more user-friendly. Users should not need to have knowledge of blockchain technology in order to use it. While maintaining decentralization, the user experience should be intuitive and accessible. This is what we are striving for with the Beans app, a non-custodial payments app (similar to global Venmo/cash-app) that is easy for anyone to use. All cross-currency payments are processed through the Stellar DEX.
Finally, decentralized bridges may provide an even more decentralized way for users to issue and redeem tokenized crypto on DEXs. These bridges would allow users to seamlessly move their assets between DEXs and other blockchain networks, which would further increase the utility and flexibility of these platforms.
In summary, the combination of tokenized crypto, issued on a decentralized exchange, offers a solution to many of the problems associated with trading on centralized exchanges. It provides greater transparency, security, and fairness for users.
