Decentralized exchanges haven’t taken off, largely due to being harder to use than centralized ones and the fact that they just don’t offer the same liquidity. Liquidity is a very important part of cryptocurrency trading because without it, prices can get a lot more volatile on some sites – or it may be impossible to put in a decent trade altogether. As a result, traders generally flock to more well-known sites that have proven volume. With Arwen and their collaboration with KuCoin, it’s now possible to mix the benefits of both centralized and decentralized exchanges together.

A Dual-Layer Approach

Arwen describes itself as being a lot like Bitcoin’s Lightning Network, using two layers to facilitate trading. In the case of exchanges, this involves both the user and the exchange locking funds up in a smart contract on the blockchains they wish to trade on, ensuring that neither party has full access to anything and, in the worst-case scenario, both are reverted back to their original state. This removes the risk of rogue actors, hacks, etc. that have plagued multiple exchanges in the past, with the Mt. Gox incident being the biggest.

It’s worth noting that this works differently than decentralized exchanges, as those generally have users trade within a new coin (for example, on the WAVES DEX, you utilize WAVES). In this case, trading from Bitcoin to Litecoin would involve coins on only two blockchains: BTC and LTC. There’s no need to obtain a third-party coin or anything, making it a lot more user-friendly.

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Speed and Cost Comparison

When it comes to the speed and cost of transactions, there should be minimal differences. In contrast to DEXs, where each trade generally gets pushed to the blockchain for confirmation, in this case it’s all handled through the smart contracts themselves in an off-blockchain fashion. This lets transactions be made extremely quickly, and it also allows you to do multiple trades with a single transaction – what’s changing isn’t information on the main blockchain, nor on the exchange that’s being dealt with, and rather the second layer. Once fund retrieval is desired, the contracts are closed and everything is settled properly.

Currently Testing Real-World Usage

This new settlement layer is now being tested on the KuCoin exchange to see just how well it works and to iron out any potential issues. It’s currently limited at escrow deposits of approximately $100 and trades of $25 per time while in testing, but it is a great start. Assuming this picks up and continues to grow, it could be a game-changing technology for facilitating the trade of cryptocurrencies without the risk of entrusting third-parties with the funds and having to worry about theft, bugs, etc. causing financial loss. And as of now, Arwen is looking for new partners to bring their revolutionary technology to.