Binance DEX nears completion — but just how decentralized is it?

Leading cryptocurrency exchange Binance has released a sneak preview of its soon to launched decentralized counterpart. In the video, a familiar user interface is revealed — although behind the scenes it is to be supported by a different, decentralized infrastructure. So just how decentralized will this new exchange be?

The rush for decentralization

As centralized spots in a decentralized network, centralized exchanges represent vulnerabilities in the crypto ecosystem: these points are prime targets for hackers, with some estimates suggesting that 980,000 bitcoin — around five percent of the total supply — have been stolen from exchange wallets. Not only that, but many centralized trading platforms have been accused of opaque liquidity management, fake volume, wash trading, and an inability to resist censorship.

In response, numerous decentralized exchanges have sprung into development, and nearly 250 projects — including several foundational protocols — are contributing to the decentralized cause. These hope to create a safer, more sustainable, and more resilient trading ecosystem, in which the exchanges themselves are as decentralized as the cryptocurrencies that trade on them.

With user data spread across multiple data points, DEXs have obvious security advantages over centralized exchanges, and also offer a number of other potentially significant advantages.

• Users retain custody of their own funds and do not have to leave their crypto in the wallets of centralized exchanges
• Users retain anonymity and may not have to complete the KYC steps required by most centralized exchanges.
• Trading fees are generally dependent on gas fees, and are not controlled by the business models of a centralized exchange.

As of yet, DEXs only transact a small percentage of the trading volume that centralized exchanges do, representing a particularly misunderstood area of the crypto ecosystem, and one that is plagued with bad user interfaces and less-than-stellar reputations.

The entry of Binance, however, which has rapidly risen through the ranks of crypto exchanges since launching in mid-2017, has led enthusiasts to speculate that a new wave of market participation might be entering the world of decentralized exchanges. But as a "hybrid" decentralized exchange, the Binance DEX might be less "decentralized" than expected.

Hybrid decentralization

Instead of focusing on the benefits of decentralization for providing freedom from censorship (it is not yet clear whether or not KYC will be implemented on the exchange) the Binance DEX appears to be more focused on using decentralization to provide greater security, and inspire a more involved community.

To achieve this, the Binance DEX will be built on its own blockchain — the Binance Chain — which uses Delegated Byzantine Fault Tolerance (dBFT), a consensus algorithm shared with the NEO blockchain, and one that has also faced criticism for allowing centralization. Furthermore, as Binance are thought to hold the majority of Binance Coins (BNB), which will be switched over to the new mainnet when the DEX is launched, the exchange will arguably technically only be semi-decentralized.

The community-oriented aspect of the exchange, however, seems to fully express the decentralization ethos: users will be able to propose new trading pairs, and hold a democratic vote to determine which of them should be listed. With the exception of small exchange The Token Store, the Binance DEX will be the first to allow users to add tokens, a process which has not yet been successfully decentralized, perhaps because of the ease with which scams could potentially be facilitated. This reflects a distinct change in tack from the strict controls exercised by the Binance team over listings on its centralized exchange.

It is unclear if Binance will charge listing fees for tokens on its new exchange. The company has faced community criticism in the past for its high listing fees — something it tried to address in October when it annouced all listing fees henceforth should be described as "donations" and would given to charity.

Security remains a key selling point for the DEX, which will allow traders to maintain control over their private keys at all times. Instead of surrendering funds to hot wallets, the decentralized exchange will allow traders to issue and exchange digital assets without having to deposit onto a central exchange: a feature that Binance founder Changpeng Zhao said: "makes it possible for your funds to be more SAFU than ever before". Along with using Binance’s own decentralized applications like "Trust Wallet", which will store private keys offline, traders will also eventually be able to use hardware wallets like Ledger to trade on the exchange.

Three big issues for DEXs to date have been price slippage, lack of liquidity and poor user experience. Slippage occurs when delays in order settlement can affect the price users pay for their trades (up or down). Zhao has stated in recent presentations that given the Binance DEX is being built on its own blockchain (the Binance Chain) transactions would be instant. As to the potential liquidity problems, Binance has some distinct advantages in terms of converting potential users, given the huge market presence of its current centralized exchange. User experience is also addressed Zhao says as the user interface will be much the same as that of the current Binance exchange.

With such a famous community figure as Zhao at the helm, it is reasonable to suggest that the Binance DEX was never going to be fully decentralized. And as some Twitter commentators have suggested, a more appropriate term might be "non-custodial exchange".

Nevertheless, the exchange still looks to represent another important step towards decentralization, which, as IDEX founder Alex Wearn recently pointed out, is not always so easily defined.