2018 could end up being a banner year for a much-hyped cryptocurrency creation.
Heralded as a way to put true custody back into the hands of traders, decentralized exchanges have moved out of R&D phase and are enrolling early adopters. But before users can start rejoicing, there's a serious chicken-and-egg problem, one that entrepreneurs believe is preventing the model from challenging the Coinbases and Krakens of the world.
In short, you need liquidity to get adoption, yet in order to get adoption, liquidity must be good, a fact acknowledged by even those who see the potential in more high-tech trading offerings.
But more broadly, it's worth looking at how centralized exchanges solve this problem. Oftentimes, they make deals with market makers to incentivize them to create liquidity. These incentives usually come in the form of a rebate or reward that's exchanged for the guarantee a certain amount of what traders call "order book depth" is maintained at all times.
Some centralized exchanges will even employ temporary strategies to solve the problem, such as market making themselves with their own capital, and will basically replicate order books from other more liquid exchanges (plus a spread) to try to attract traders.
There are some practical issues: decentralized exchanges are limited to trade in cryptos only. That means people can't actually use regular US dollars to buy a token. They first have to go to a regulated exchange to put in US dollars (or other government-backed currencies) to buy bitcoin or ether.
Then, with bitcoin or ether, they can go to a decentralized exchange to buy the more tokens. As such, it's perhaps no surprise that to those familiar with more user-friendly Wall Street solutions, this can all seem a bit much.
More information: www.coindesk.com