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Passive income from decentralised exchanges and markets, what are the risks?

07th Nov 2018
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A DEX is a decentralised cryptocurrency exchange. Most DEXs, today do not have any KYC and AML compliance. The road ahead for DEXs is foggy at best. There is uncertainty on how they will coexist with regulation. Some decentralized exchanges have the potential for passive income through the sharing of fees and profits. In this article, we look at the pros and cons of decentralized exchanges in particular from the perspective of the passive income investor.

What are the benefits of Decentralized exchanges?

Decentralized exchanges are systems that transfer value in the form of cryptocurrency anonymously between anonymous peers. They act as digital cash exchangers with the benefits that peers can be anywhere in the world. They can be operated by anyone without any license.

They provide

  • Fungibility. Meaning that one token is equal to another token, irrespective of where it has been and who has owned it. Without fungibility, tokens can never be a currency. In centralized exchanges, not all tokens are the same some transactions can be blocked.
  • Censorship resistance. Individuals can transact with anyone without needing approval from a third party or without a third party blocking them.
  • More secure. Centralized exchanges retain control of the coins which increases the risk of loss, decentralized exchanges operate on the basis of smart contracts. There is no human in the middle that can block the smart contract. (Except for the miners / Block producers)
  • Privacy. Traders and Financial institutions require a high level of privacy because their business deals and trading is their competitive advantage. Using centralized exchanged could provide a source of leaks of important information.

Other benefits

  • Liquidity. DEXs add liquidity in the crypto markets, some players only trade on DEXs because it is the only option available for them or for that token.
  • Facilitate funding for new projects. Some project can only sell their token on DEXs. They do this because centralized exchanges are very expensive to get listed on.
  • Passive Income opportunities: Some DEXs offer share in the fees of token holders.

Decentralized exchanges are extremely useful for people who are in the land of TINA (there is no alternative). These would include war refugees, people living in hyperinflation and people who risk losing their life savings to currency wars.

DEXs, however, have a dark side. They facilitate the exchange of untraceable value. Some claim that the problem should not be tackled at this level, others claim that the “follow the money” doctrine works to curtail crime. Whatever side of the argument you are on, the facts are that DEXs:

  • Facilitate Money Laundering. Because coins can be move without a trace from one blockchain to another making it hard to follow the money trail.
  • Enable the Monetisation of Hacking and Crypto Jacking. Hackers and Crypto jackers can move the proceeds of crime easily and make then move them around more easily.
  • Facilitate the evasion Capital Controls. Capital controls are rules which prohibit the movement of funds across borders. DEXs allow the movement of Bitcoin to stable coins which can be moved to FIAT across the border.

There are several key players in the DEX space. They have different agendas, power, influence, resources and motives.

  • DEX Projects
  • Nerds, crypto enthusiasts, developers, investors, founders
  • Genuine Traders
  • Criminals, Market manipulators, Pump n’ dumpers
  • Governments, Taxpayers, Regulators
  • Other parties. ISPs, Social Media giants, advertising platforms

The DEX projects are the ones creating the software to create the DEX. Their interest is to make money or to further tech or a mix of both. Blocknet [LINK] is one such project. Techies, Crypto Enthusiasts and investors invest in Dex projects either because they are “part of the community” or because they want to make money. Genuine Traders use DEXs because some coins are only listed on DEXs (for example Fork Delta). Criminals use DEXs as their digital washing machine.

There are several schools of thought on what the ideal Government should do and how they should do it. Some advocate for central control others for more liberal regimes. Ultimately Governments interest is protecting their citizen-voter in the most efficient manner and uphold the law.

A one size fits all regulation that casts a wide net is the currently preferred method of patrolling the area of finance. KYC/AML and securities laws are very strong and anything falling outside of those laws can expect repercussions. Governments need funds to serve the citizen-voter.

If DEXs become too big to ignore they will be stopped. The risk is that since DEX are not KYC / AML complaint. Governments could make the use of DEXs illegal. Probably it already is in some jurisdictions.

There are other parties which have a lot of influence; these are the likes of Google, Apple and Twitter. It is not uncommon to censor companies by limiting their advertising or banning them. It could be that DEXs could be attacked from this vector as well.

Governments the world over are calling out for international regulations

Passive income from DEXs

Passive income from exchanges is interesting because it is a “tools and picks” strategy. [LINK] However investing in anonymous DEXs poses an important regulatory risk. Some projects will capitulate and will require KYC and AML regulation. Others will be forked leaving the previous investors with a portion of their previous investment. Crypto itself is a risky asset class and DEXs have additional risks, investor be warned!

How to make Passive income from DEXs

  • CryptoBridge: Staking will entitle the holder to a percentage of the fees
  • BlocKnet: Masternodes, Staking and BlockRewards
  • Particl: Particl is launching their own decentralized Marketplace, there are many parallels between decentralized exchanges and decentralized marketplaces.
  • Pivx: Building an in wallet dex, the masternodes can share in the marketplace fees,
  • Idex: Aura token holders can earn a share of the fees when staking
  • See also : Passive income from centralized exchanges

Final thoughts

It seems, that for now DEXs are tolerated in most first world countries. We know that a financial storm is coming. Some tell-tale signs include; the war on cash, trade disputes between the superpowers, the 10-year rise in stock market prices, the growing level of government debts and the shifting demographics. Change is coming.

This is why it is important to build your passive income portfolio with care and diversify into other forms of passive income such as real estate and dividend and bond passive income.

If Dexs are made illegal, law-abiding citizens living in advanced societies, will not risk using decentralized exchanges because they have a lot to lose. When faced with a criminal offence most crypto passive income investors will choose other crypto passive income investments which are more government-friendly. Make sure to stay up to date with the latest crypto passive income news to catch these trends as early as possible.

In the end, most likely the DEXs or forks thereof will have no other option but to incorporate KYC/AML to survive. Another possibility will be a revival of the idea that crypto investors will have to declare all their addresses. This was proposed by the European Parliament in 2017/2018.

See Also:

 

Take care out there!

 

Not investment advice. Not financial advice. Consult your financial advisor. Not a recommendation to buy, sell or hold. The staff of this site may own this digital asset/s mentioned on this page. Investing is risky and you may lose all your capital. See full disclaimer.


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