If a centralised crypto exchange falls or is hacked, the system could be crippled, and users assets could be lost. Popular Indian cryptocurrency exchanges, on the other hand, are embracing the concept of Decentralised Exchanges (DEX) as a potential solution. In 2021, India was placed second in the world in terms of crypto adoption, after only Vietnam.
Users can save their bitcoins in electronic and physical wallets, or trade them on more secure DEXs. On this, trades are made directly between investors over a blockchain-based peer-to-peer network. There is no centralised third-party that takes custody of customer funds other than the customers themselves. This could be the need of the hour as in August, a cyberattack on the Japanese exchange Liquid resulted in the theft of $97 million in cryptocurrency.
Concerns about privacy and KYC
DEX is being viewed as the future of crypto and decentralisation by certain Indian crypto exchanges. When signing up for a DEX on a centralised exchange like ZebPay, users are obliged to disclose their personal information with the exchange. With DEXs, there is no trusted third-party involved hence no KYC takes place.
It raises privacy problems for crypto exchanges, especially given the general lack of legislative clarity.
DEX ecosystem in its infancy
DEXs include dYdX, UniSwap, and others. Hundreds of millions of dollars are traded every day on PancakeSwap, 1inch Liquidity Protocol, and SushiSwap. Nischal Shetty, the Founder & CEO of WazirX feels the global DEX ecosystem is still in its infancy. Getting a DEX off the ground and seeing good transaction volumes early on, he believes, will be difficult.
WazirX was the first Indian crypto exchange to officially announce that it is working on a decentralised exchange. Polygon (formerly Matic Network) — an Indian business that has developed a Layer 2 Ethereum scaling solution – aims to commercialise it. Customers should not be forced to trade just on decentralised exchanges or centralised systems, according to Nischal.
Observance of the law
Although the model for creating a DEX is simple and has been done before, local and federal governments continue to scrutinise it. There could potentially be further legal concerns with existing investors under Indian or Singaporean law, according to Tanvi Ratna, Founder & CEO of independent research and strategic advice group Policy 4.0. However, even if specific founders are targeted, DEXs may continue to operate.
With their DEX plans, leading Indian crypto exchanges hope to stay on the right side of the law. In India, no government can regulate or censor a DEX, and exchanges are not trying to go around the legislation. According to Ashish Singhal, Founder & CEO of CoinSwitch Kuber, the rule is in place to safeguard everyone while also fostering a collaborative environment.
Is it possible to create a hybrid model?
A hybrid centralised/decentralised strategy, according to Ashish Agrawal, could be the way forward. Centralised exchanges, according to him, might be more controlled, dependable, and user-friendly. They assist in balancing the demand-supply ratio and allowing users to exchange currency without relying on third-parties.
CoinSwitch Kuber is focusing on liquidity aggregation solutions, which might be a crucial component if it decides to construct a DEX. Users interact with a centralised frontend system, but the backend is decentralised, according to the CoinSwitch CEO.