Are Decentralized Exchanges (DEX) really Decentralized?

When the floodgates of the Bitcoin era opened up about a year back, the world was introduced to the concept of digital coins. Though people had been mining it for years, it was now taking center stage. No longer was it unusual to hear of news floating around about how there was a whole building full of people in China, sitting around and mining Bitcoin. This does raise a question of whether one entity can gain complete control of the exchange to sway it according to its preference.

For years the central authorities, as well as central exchanges have been combating this problem, where a few big players control the entire flow of the market. With decentralized exchanges (DEX), this problem just goes up several notches, as there is no agency in control of the laid out rules and restrictions.

A quick recap on decentralized exchanges will tell you that they are unlike central exchanges like the NSE or Dow Jones. These exchanges do not have a central authority and work on the basis of smart contracts and approvals by the entire community in that blockchain.

The argument about whether decentralized exchanges are really decentralized came into the mainstream when Charlie Lee proclaimed, in a tweet, that decentralized crypto exchanges are, by definition, vulnerable to a 51% attack. This tweet came after Ethereum Classic had an attack of this sort, which blew its net worth by 10%.

Post this, ETC froze trade and mining activities temporarily. This is not the first time this has happened as even in the case of Bancor, we did witness the freezing of funds. However, this does beg the question of whether the exchanges genuinely are decentralized.

It is quite a thought now, isn’t it? Almost hits the philosophical question that one can have over a glass of whiskey, in one of those high-end ‘members-only’ clubs. Are these exchanges really decentralized? Is it what it seems to be or does it have layers to it?

I suppose the additional question that also comes to play is if the world is even ready for decentralized exchanges.

Of course, these are subjective questions and your preference will deeply be impacted by your own political and policy orientation. Let me first explain what I mean when I say this (Kindly hold your pitchforks, as of now. We still have some of that whiskey to get through).

Decentralized exchanges, by their inherent quality, harbor strong possibilities of a hostile takeover. There is the possibility of this happening if many people in the same blockchain work with the same entity, and the contracts that do get approved along the blockchains can also be manipulated to some exchange.

This raises the question about the just-ness, as well as the equality in the system where the availability of resources and manpower can tilt luck in your favor.

Does the modern day capitalist democracy dictate the ability and allowability of such a situation? Indeed, many would argue that one should let the market take its course and not interfere by means of artificial barriers. After all, economists for generations have been propagating the need for such a system.

However, even Adam Smith with his invisible hand failed in a situation where Keynes and his idea of government intervention saved the world from plummeting deeper into depression (Read: 1930s; the Great Depression). Perhaps some amount of intervention and scrutiny will play well in our favor till this market becomes more mature and its traders, more knowledgeable.

However, come to think of it, having a system or exchange where the activities can be frozen by certain agencies does make it something that is not purely decentralized. Maybe it’s not a bad thing. There has to be a way to prevent an attack of massive scales as it may just ruin the value and liquidity of the market.

It does end up being a matter of numbers, really. Currently, the number of traders, worldwide, in these markets is relatively small. So, the impact of one big shark can lead to a devastating blow. Perhaps some scrutiny will help ease things until the markets mature a little.

Yes, it does go against the basic logic of decentralized exchanges, but reality often is a distorted version of theory. The theoretic logic of DEX may perhaps need some training wheels till it finally does find the ability to fly stably and soar high as an eagle. That said, the world does have the habit of getting too comfortable with such temporary measures and goes about making them permeant. That should certainly be dissuaded. This will happen, only when the purpose of these training wheels is extremely clear and also that the mechanics are kept in standby to dismantle them, once the system has gained more stability.

And until then, I shall wait here, sipping my whiskey and taking on all the pitchforks that will soon find me.

The views and opinions expressed in the article are solely the author’s and does not represent any of the actual entities mentioned above.

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