When it comes to in-person fiat onramps, LocalBitcoins used to be the gold standard. It was the easiest way to use cash to buy Bitcoins and in many countries, its volume has been steadily growing. However, now that they’ve disallowed cash purchases they have opened up the market to new competitors. Bisq and Hodl Hodl are two such exchanges that allow for local cash purchases of cryptocurrency and claim to be decentralized. However, it’s important to ask: how decentralized are they really?
Defining a Decentralized Exchange
A decentralized exchange, or DEX, is one where no person, group of people or corporation controls the trades taking place. Trades cannot be censored and, ideally, the exchange cannot be shut down even by a government or other task force.
The principle behind a DEX is that it has redundant servers throughout the world or runs on a blockchain like Ethereum which is widely distributed. Further, since there is no single controlling entity, nobody can be forced to shut it down. In a way it’s almost like a forest fire: once it’s started it’s incredibly difficult to stop. Having said what a DEX looks like ideally, let’s look at Hodl Hodl and Bisq to see how they stack up.
Hodl Hodl Exchange
Hodl Hodl is a non-custodial exchange meaning that they don’t hold their client’s funds, at least not permanently. The trading process is straightforward. First, a contract is created based on what the buyer and seller have agreed upon. Hodl Hodl then creates a new multisig escrow wallet where the seller deposits the cryptocurrency. From there the buyer pays the seller with the payment method agreed upon. That could be through cash, a bank transfer or bank deposit. Once the funds have cleared the seller releases the crypto from the multisig wallet and the trade is complete.
The advantage, of course, is that since trades take place locally they cannot be censored and also there is a large increase in privacy. No funds move through an exchange where transactions are associated with a user’s identity.
How decentralized is Hodl Hodl? Well, it’s certainly not as decentralized as they would like people to think. For instance, the exchange is currently blacklisted in the United States. That means American citizens cannot use it and it’s not because regulators have banned it but because Hodl Hodl itself has restricted access. Clearly, any exchange which can ban customers from a certain country is not truly decentralized. A fully decentralized exchange would be open to everyone, regardless of where they live.
Hodl Hodl, however, does have an advantage in that it does not require any KYC or AML procedures. That allows users to trade anonymously. They also only charge a 0.6% fee per trade which is generally considered to be a fair price. Finally, Hodl Hodl recently announced support for Bitcoin’s Lightning Network.
Bisq is similar to Hodl Hodl in that it allows users to create accounts without having to prove their identity with KYC. Unlike Hodl Hodl, however, Bisq is a desktop program that must be downloaded. The software is opensource and for technically minded users it can be compiled from source. According to their statistics page, just under 12,000 people have downloaded the Bisq exchange so far.
Initiating a trade on Bisq is similar to Hodl Hodl. A buyer searches through the available offers and finds a seller that they trust. A contract is created between the two parties and the seller deposits the Bitcoin into a multisig wallet. The buyer then pays the seller according to the agreed upon terms. This could be cash in person or it could be through a bank transfer. Bisq, however, does not allow for a credit card or PayPal purchases as both of these make chargebacks easy.
Once the seller receives the funds they release the Bitcoin and the transaction is complete. One thing worth noting with Bisq is that each transaction requires a security deposit from both the seller and the buyer. This is to ensure that the transaction goes smoothly and neither party tries to cheat the other. While it’s a good concept, it could create problems for lower-income traders who may not have a lot of extra Bitcoin lying around to use as a security stake.
How decentralized is Bisq? More so than Hodl Hodl but it’s still not perfect. While Bisq is available in the United States, there is a central point of failure that the Bisq team is well aware of. The Bisq network is distributed worldwide and would require a coordinated effort from multiple governments to take down. The governance of the exchange, however, is still centralized.
As of now a small group of people control the exchange, make the decisions about the direction it’s heading in and solve the disputes that arise between traders. Were these people to be arrested or otherwise interfered with, Bisq may cease to function smoothly. The Bisq team is aware of this and are taking steps to remedy it, including the use of the BSQ token for community voting, but as of now, it’s still centralized in this regard.
The Future of Decentralized Exchanges
While the DEXs of today may be imperfect, there is a lot of potential in this space for a truly decentralized platform to emerge. One where anybody from anywhere in the world can use it and decisions are made in a decentralized way without any one person or group having control. It will be very interesting to see how long it takes for a DEX like this to emerge and how regulators and governments will react to it.
Still, Hodl Hodl and Bisq are viable alternatives to centralized exchanges and provide a valuable service for people who would like to buy cryptocurrency with cash or a bank transfer. They both also have the potential for improvement and it could be one of these platforms that becomes the gold standard in decentralized trading in the future.
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