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Because most decentralised exchanges are "fake". Realistically, a decentralised exchange can only operate within a single blockchain, only trading tokens on th
by phire 3y ago
Because most decentralised exchanges are "fake".
Realistically, a decentralised exchange can only operate within a single blockchain, only trading tokens on that blockchain. Works fine for trading between (for example) eth and its various tokens, but you can't do proper eth to bitcoin trades. [1]
The single-blockchain decentralised exchanges are typically real [2], but every multi-blockchain "decentralised" exchange platform cheats.
Some are literally just centralised exchanges that pretend to be decentralised with a slick software interface. The more common technique is to run their own blockchain and have valid decentralised trading on that. But you are only actually trading tokens that represent real coins. They then run a centralised holding entity that holds the real coins and implements deposits and withdrawals just like a decentralised exchange.
There are so many flaws with this scheme.
The holding company could literally run away with your funds. Bugs and exploits (and even normal blockchain behaviour like re0orgs) can result in the three seperate sources of truth (the real blockchains, the holding entity's internal database and the trading blockchain) ending up out of sync.
And just because the trading blockchain is a blockchain doesn't mean the company that controls it doesn't have the keys and power to rollback trades and otherwise change the contents.
[1] Yes, atomic swaps are a thing. But they are resource intensive and slow. I'm not aware of much decentralised trading that uses them.
[2] Though, the topic of wrapped coins complicates things.
- dboreham 3y agoThere are non-custodial bridge schemes that have been proposed (but afaik not yet proven). The idea being that the holding company you mention is replaced by an L1 escrow contract. This trust minimized approach is not trivial to implement but at least I think I see how it could work.
- phire 3y agoThe idea of non-custodial bridges runs straight into the oracle problem. How does the smart contract on one blockchain know the state of the smart contract on the other blockchain. One common workaround is to make the miners/validators of the trading blockchain cross-validate transaction on the other blockchains. But that's inherently one-way, the smart contracts on the other blockchains have no true visibility into the trading blockchain. It's still impossible to get 100% right. You still have a massive surface area for bugs and exploits. And even if it's free of exploits, people forget that blockchains are only "eventually consistent". Just because escrow validated that the two blockchains were constant at the time of the cross-chain swap doesn't guarantee both blockchains have reached their final consistent state. This will eventually result in the two blockchains getting out of sync. I've seen smaller blockchains do re-orgs over a week worth of blocks. Finally, many popular blockchains don't even have powerful enough smart contracts to even implement a bridge contract (bitcoin certainly doesn't).
- injeolmi_love 3y agoYou’re correct about most of the existing cross chain apps, but there’s a wide variety of operational cross chain communication protocols that are decentralized. Chainlink CCIP & Cosmos IBC are the first that come to mind.