Centralized Exchanges Increase Trade Efficiency And Speed But Increase Cost And Risk

By Smoljanović | Smoljanovic | 28 Mar 2020

Centralized Exchanges Increase Trade Efficiency And Speed But Increase Cost And Risk

Advent Of Digital Trading

Before preparing this article about the Centralized and Decentralized exchanges, I needed to get some supplies from the city and once again emerge from my bunker to breathe some fresh uncirculated and unfiltered air.

Feeling a little apprehensive, I anxiously engaged the unlocking mechanism and proceeded to open the 1800 kg door. It felt like I was about to play Chinese Roulette as the last set of tumblers moved into place.

Upon opening the hatch, I was immediately assaulted by the smell of manure. We are only minutes from a ranch and it appeared the winds have changed direction.

I expected to see people that looked like characters from the Mad Max movie of 1979 and the sky to match what I remember in the post-apocalyptic action cinema Book Of Eli.

There was no evidence of zombies, Cannibals or ManBearPig anywhere and everything seemed normal to my delight. Stores were filled with people this morning not wearing respirators.

My little town in southern Sweden appears to be oblivious to a pandemic.

It seemed for a moment that there was a hint of an aromatic Argyle Maduro brand Corona Cigar in the air but there was no one around.

I returned to my fortress of solitude an hour later to commence work on this article.

The Coming Of The Centralized exchanges

People needed a way to trade and really had no easy way of doing so.

The process of digital trading in those days was called Over The Counter trading.

Centralized exchanges were not yet available to accommodate trading when the era of the digital age first began.

I have a foggy recollection of the Bulletin Board Services aka BBS before even Windows was unleashed upon the world. Monitors were monochrome, DOS was the OS and peculiar ASCII art was all the rage during the time I was an admin of one.

Modem speeds in the mid 1980's kept your data clipping along at about 2400 baud. Downloading an large image at that time took between minutes and hours to transfer. You could observe the progress of the image as it was downloading line by line and sometimes halt the download after realizing it was the wrong one. I would never consider going back in time to do technology all over again.

Trading at that time was done through various Bulletin Board Services, forums and social media groups and was cumbersome.

Lack of uniformity and standards made the entire process of trading online time consuming and inefficient.

An increasing demand for online trading caused people to gather and form a group that concentrated primarily on all aspects of processing data to facilitate an easier way of connecting traders together.

Centralized Exchanges eventually replaced the inefficient OTC trading but not without many serious risks and flaws. Efficiency of the CEX was a definite improvement over the OTC and increased the levels of trading and implemented a better pricing method.

The group that was formed became know as a Centralized Exchange. The exchange would take the digital assets from the traders and lock up the liquidity of the funds during trades.

Being a monopoly, the CEX was able to extort exorbitant fees from companies hoping to use them as a trading platform.

Although centralized exchanges increased trade efficiency, eliminated default risk and provided an effective pricing mechanism, these benefits came with a price.

The sheer volume of assets the Central Exchanges took total custody over raised considerable concerns among the trading parties. Blind trust that assets would not be misplaced, misused or simply hacked was necessary didn't sit well with traders.

Communities often could not afford to pay the high fees while other unscrupulous projects paid over half of there budget and used the rest to inflate their cryptocurrency.

It was only a matter of time for a new form of trading to arise in an effort to address the obvious corruption in the centralized exchanges.

Why Centralized Exchanges Still Exist

Centralized Exchanges still exist today because they still have something valuable to offer. Many traders still prefer the old CEX trading and for justifiable reasons.

Transaction Speed - Waiting times of longer than 40 minutes are not uncommon when exchanging Ethereum on a DEX
Liquidity - Cross-Chain liquidity has users scrambling and is an enormous challenge.
High Transaction Fees - Decentralized Exchanges have far to go to reduce high transaction fees.

Basically, decentralized exchanges are not that easy to use for beginners and do not boast the speed and liquidity that the Centralized Exchange can offer.

The Coming Of Decentralization

Problems with security in the Centralized Exchanges necessitated the creation of a Decentralized Exchange.

Removing The Middle Man

Decentralized exchanges most importantly removes the middle man and relinquishes the control of private keys giving traders assurance that their cryptocurrency will not be so easily stolen as has been done throughout history with the centralized exchanges.

The modern DEX provides trade-offs and in most cases is not truly decentralized any way.

The Atomic wallet is the perfect example of a DEX that is not fully a DEX. An atomic swap is a peer to peer asset exchange which is their answer to cross-chain liquidity and in some situations fails to deliver as in the case of Hydro. My hard-earned Hydro tokens are still gathering dust in the wallet and are now only considered to be a memento.

Another solution for cross-chain liquidity is the atomic swap. The atomic swap model is a peer-to-peer exchange of assets between different public chains, as opposed to a unidirectional asset transfer across the public chain.

A counter-party is not always available when attempting an Atomic swap making it unsuitable for satisfying on-chain order matching.

Final Thoughts

Centralized Exchanges are not evil entities and have justifiable reasons to exist but will need to increase security to compete with the new decentralization trend.

Decentralization is moving in the right direction and is not necessarily bad even if some Decentralized Exchanges are not fully decentralized.

Using a decentralized technology while using centralized governance obviously does not make a true Decentralized Exchange and should not be called one.

Governance is the hindering factor of full decentralization while the technology is actually the easy part.

A little convenience is worth it as long as you get to keep your own keys or are at least in full control of your Bitcoin, Ethereum, Ripple, Basic Attention Token, and other cryptocurrency variants when trading on the blockchains.

There exists a modern Ethereum wallet which is non-custodial but it doesn’t deal with private keys. The Argent wallet is configured and recovered using an email address and mobile number.

The option to use smoljanovic.argent.xyz as a wallet address is a welcomed change from most wallets

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Centralized Exchanges Increase Trade Efficiency And Speed But Increase Cost And Risk