The financial world continues to evolve with the advent of cryptocurrencies in the past decade transforming the way people view money. However, the new technology has brought about innovations with the decentralized nature of cryptocurrencies key to this.
One major debate that has dominated in recent years has been why there are more centralised exchanges than decentralized exchanges.
Centralized Exchanges Have Come Under Scrutiny Following High Profile Hacks
This was a leading subject following the high profile hacks to centralized crypto exchanges.
Mt Gox exchange which was the largest exchange lost over $1.5 billion in cryptocurrencies. At the time the hack saw over 6% of Bitcoins in circulation stolen.
2019 also saw a hack to Binance the leading crypto exchange with over $2 million stolen.
The case of QuadrigaCX whereby CEO Gerald Cotten died with the private keys leading to the exchange running bankrupt is another major case. There have been criticisms in recent years with Ethereum co-founder Vitalik Buterin a leading critic.
This has seen many new exchanges look towards adopting decentralised models for operation. Decentralised exchanges have always been an exciting prospect within the crypto ecosystem. This has always been embedded within the development of pioneer currency Bitcoin and was evident in Satoshi's whitepaper.
Decentralised exchanges fulfil this obligation by offering a trustless procedure for crypto asset deposits. Despite this, there have been more centralized exchanges in the past few years with the volume of crypto assets on decentralized exchanges not up to 10% of the total market cap.
To get a better overview of the differences between DEX and centralized exchanges it is important to note what differentiates them. This is easier done by noting the fundamentals of centralized exchanges.
What Does it Mean to be a Centralized Cryptocurrency Exchange?
Crypto enthusiasts will have a better understanding of centralized exchanges than decentralized ones. This is due to the availability of information regarding many centralized exchanges.
Since they are the dominating platforms with the likes of Binance, Gemini, Kraken used by millions across the world for trading needs. Centralized exchanges store users deposits in a wallet and wait for other orders to be completed.
Users can afterwards on confirmation of deposits place to purchase or sale orders. The exchanges match the orders before transferring funds. Centralized exchanges offer instantaneous transactions however there are no blockchain records of these transactions because the transactions occur within the exchange.
In addition, the private keys of your crypto asset portfolio are held by the exchange. Transactions are adjusted within the exchange to reflect the current balance after trades, withdrawals or deposits. This causes a potential risk as you rely on the exchange to have the necessary security protocols to protect your funds.
Why Decentralized Exchanges Offer More Potentials
Decentralized exchanges eliminate third party and intermediaries to provide a more transparent and user-oriented platform.
Taking Dexive a decentralized digitized exchange as an example we can see what decentralized exchanges aim to achieve. They provide a platform that reduces transaction fees and unite buyers and sellers. This is achieved using a process that increases liquidity and security and at the same time, offers greater control to cryptocurrency traders.
Decentralized exchanges just like cryptocurrencies run on a blockchain. Rather than the centralized exchanges that syndicate orders to match buyers and sellers in an off-chain system.
Decentralized systems use transparent, blockchain process that ensured safe peer to peer transactions within the exchange as a routing layer. The exchange merely acts as a facilitator with transactions occurring directly between traders portfolio.
This means that for massive adoption to occur, there have to be key issues that are resolved. The case of usability is key as decentralized exchanges offer a completely different platform to what many are used to.
Centralized exchanges currently have the advantage since they incorporate user experience that is familiar and user-friendly. Many centralized exchanges mimic online banking platforms while some DEX require users to manage private keys and have limited user interface.
These are issues that can be resolved by incorporating similar features like centralized exchanges to increase adoption by average traders. However, as DEX becomes simpler and user-friendly, we can expect their popularity to increase. There are tons of decentralized exchanges cropping up specializing in different markets.
This shows that many developers are looking to maximize the relatively new sector within the crypto ecosystem. If the rate of developments continues we can expect new innovations within this sector.
As the blockchain industry continues to evolve we could see some of these platforms challenging centralized exchanges in the future for market share.