As mentioned in an excellent post by @schnorr (Most Important Decision), the use of validators and other forms of “centralization in disguise” is an important and imminent crossroads facing the decentralized exchange (DEX) space. We believe that a decentralized means of transacting with others is critical to achieving Satoshi’s vision of a P2P trustless network, especially considering that all centralized models for exchange and trading fail that standard. DEX’s specifically have made great strides in breaking from traditional gatekeeping (such as KYC or AML), but also stumble when it comes to maintaining true decentralization (hosted order books or relays, validators, over reliance on one chain, etc…)
While the release of Borderless will be an exciting boon to the space, a rising tide lifts all boats and we want to equip any and all exchanges with a means of remedying any current shortcuts that result in centralized liabilities. This is why we are creating the Validator Watch List, a comprehensive list of all DEX’s and their points of centralization. It is our hope that this list, along with accompanying definitions, will encourage our neighbors who are striving for decentralization to find meaningful solutions to serious vulnerabilities.
Off-Chain Order Books
An order book is a critical component of an exchange. If the order book of an exchange is corrupted in any way (only possible if it is hosted in a centralized manner) the results could be devastating: front running, price manipulation, and more are very real dangers for a DEX using order books that are not decentralized .
Validators (Hosted Relayers / Indexers / Arbitrators)
Validators, or centralized means of verifying things like order books and multiple chains, are problematic as they is introduce a vulnerable node in an otherwise trustless transaction. Worse still, with these validators occur in self-branded “decentralized” exchanges, which could lead individuals using the platform to not realize they are at the mercy of a central entity.
Only Ethereum (ERC-20)
Over-reliance on one chain is itself a point of vulnerability, as bandwidth issues, similar to those we saw on Ethereum during the height of CryptoKitties, can throttle trades and dramatically impact speed. Furthermore, relying on one chain restricts the DEX to assets only available on that chain.
Representational Assets (Stellar)
Currencies that are not on Stellar are traded as representations (not the actual currencies), this results in centralization at the point of a representational asset being tied to a real asset.
Atomic swaps do not use “validators” per se, but they do utilize the Lightning Network to execute their hashed time-lock contracts. By virtue of relying on the Lightning Network’s trusted nodes to execute contracts, these solutions are ultimately centralized to some degree.