Lately, there has been a buzz about cryptocurrency and blockchain technology. The adoption of this technology is gone global, the market capital has been reaching the sky and the per day transactions volumes have reached $20 billion. The blockchain is been utilized in different use cases and the need for third parties for the exchange of goods and services is been removed.
Ironically, 99% of the transactions of cryptocurrency pass through centralized exchanges on platforms such as Coinbase, Binance, and Bittrex. That’s right, decentralized assets are being stored and traded on centralized platforms which operate as escrows for their clients and do not record transactions on the blockchain. This has lead to security breaches and unsafe handling of funds, private key, and private data. In 2018, more than $730M in cryptocurrency has been stolen by hackers.
Everyone knows that cryptocurrency is a bit of a risky business, but the ones who are ready to take this risk of trading cryptos can do so. The blockchain community has realized this issue and many of the entrepreneurs have taken it on themselves the future of Crypto Trading, i.e. Decentralized Exchanges. The main goal is that the traders should have the custody of their funds.
Before going any further let’s know more about some terms;
What are Centralized Exchanges (CEX)?
It is a third party platform that matches two separate entities, like individual and institutions, who are looking to transact or exchange with one another. Centralised exchanges follow KYC and AML verification and also facilitate fiat on/off ramp. Personal details, account balance, portfolio allocation and fund opposition of the customer are stored in the centralized exchange platform.
What are Decentralized Exchanges (DEX)?
It is a market that does not depend on the third party services to hold the customer’s funds. It is not run by any individual as it is a distributed ledger. Decentralized Exchanges do not facilitate fiat on/off ramp. On the contrary to Centralised Exchange, this platform does not store the personal information of the customers like Personal details, account balance, portfolio allocation and fund opposition.
Let us compare Centralised Exchange and Decentralised Exchange and check for ourselves why Decentralised Exchanges are better on the basis of some features.
DATA STORAGE SECURITY
The biggest flaw of Centralised Exchange is that they have an online database which stores the public and private keys of the users. This gives easy access to the hackers to steal the user’s personal details. Major companies have also experienced this wherein their cloud database was breached.
If the top most companies couldn’t store their user data, we can assume that cryptocurrency exchanges will be hacked in the Centralised Exchange platform.
The protocol of Decentralised Exchange explains everything. It eliminates the risk of trustless transactions, without a middleman and by placing the huger burden of security on all the users rather than a single custodian.
By Associating with hardware wallet, it allows to store their coins on cold storage and also trade tokens and the same time. Because the platform does not store the users public or private keys, it is prone to large-scale hacks.
SERVER DOWNTIME ISSUES
In October 2017, the prices of bitcoin and ethereum fluctuated which caused large-scale outages.
Every time Bitcoin dropped the price, it became impossible for users to sell their Bitcoins until and unless the volatility stopped. Last year in November and December, Coinbase suffered from 30 incidents that resulted in downtime, maintenance or delays.
This platform will have the advantage of working like BitTorrent, i.e. the overall computational power will increase as more nodes will be added every time there are many users logging in.
IDENTITY BREACH RISK
Many of the governments have issued centralized exchanges for taxes and oversight reasons. Due to which they ask for information like, Address, Social Security Number, Copy of Passport, Copy of ID or Driver’s License and Copy of Utility Bill from their users before they can start trading in few dollars. We assume that this exchanges will be hacked and when that happens all this personal data of the users will be at risk.
Authentication by design is not required in the Decentralised exchange. The only requirement for trading is owning a hardware wallet or a web wallet. In simple words, anyone can trade without a profile. No profile means no social security number is required or any ID photo that can be stolen.
LABORIOUS VERIFICATION PROCESSES
Because of the huge amount of documents, it consumes ample of time for verification as the Centralised Exchange have to review manually. Most of the exchanges take deposit fees and withdrawal fees, which takes additional verification steps to overcome.
Because there are no requirements of authentication and no deposit or withdrawal fees, Decentralised Exchanges do not suffer this problem.
High fees are charged by most of the exchanges. Coinbase charges fees of 1.49% by bank account or 3.99% by credit card in the US. 0.25% of fees are charged by other exchanges like Bittrex.
Many decentralized exchanges like Waves are moving to a very small fixed fee system, where a $100,000 order will cost cents, compared to $1,490 on Coinbase and $250 on other centralized exchanges.
Decentralized Exchanges have a great scope ahead. Here we discussed what is Centralised and Decentralized Exchanges and the compared them both. In the comparison, we can see that why Decentralised Exchange can be the future of Crypto Trading. There are already many players that have started entering the market with Decentralised Exchange and with time will grow. These can very soon be the pillars of Blockchain ecosystem.