[DEX Series #3] Governance and Control Distribution of Exchanges
The previous two episodes of the 0xcert DEX Series talked about identities in crypto assets and ways of trading with them. The third part explores governance and its influence in crypto asset exchanges.
Governance has turned into an essential part of trading with digital and crypto assets. Decentralized exchanges provide important advantages that would reduce the need for employing internal rules, terms and agreement conditions.
Blockchain Yes, Decentralized Governanece No?
Over 2.000 crypto assets have been in circulation and traded on cryptomarkets, and their number has been increasing consistently. Multiple reports show that the early boost on cryptocurrency exchanges was also intercepted by black market vendors and other criminal entities with a lust for crypto.
The vast majority of exchanges that were attacked or hacked exchanges have been of a centralized structure. Centralized governance of these platforms, despite providing regulatory bodies with an image of control, have suffered from several unpleasant effects that damage the core principles of the blockchain.
Centralized Exchanges with Regulated Approach
Different regulatory areas inpose different governance and regulative mechanisms. Many exchanges had to abide by government regulations, mostly through employing standard banking practices such as KYC (Know Your Customer) and AML (Anti-Money Laundering). The purpose of these mechanisms is to prevent potential hacks and identity abuse, and serve as one of the initial steps towards the safety of trading platforms and their users.
Different degrees of governance and operational limitation has influenced some cryptocurrency exchanges to become available only in certain regions or countries. However, the regulatory mechanism, has still not fully improved the risk safety for the user. Trading on a centralized exchange, users make deposits to execute transactions — these funds are stored and owned by the platform, despite the user being able to manage them in their account. Same goes for order books and actual custody of value, the value remains in the realm of the centralized exchange.
No Middleman, Just Users in Control
Inconvenience of having centralized platforms governing the assets could be tackled by shifting towards decentralized exchanges. Trust facilitators thus become the reliability and infrastructural stability of an automated blockchain-run platform, and not the Terms & Conditions applied by the platform manager. Without the need to rely on third party management of platform, the middleman becomes obsolete.
In a different way than on centralized exchanges such as Bitstamp, users of decentralized exchanges (like IDEX) keep their assets stored in their private wallets, separately from the exchange and run transactions through them. The assets remain in controlled by the users, which is one of the main advantages of decentralized exchanges.
Power to the People
Blockchain-powered decentralized exchanges could be either controlled by no one (fully decentralized control) or partially controlled by the exchange creators (decentralized use and partially centralized ownership), yet they still provide diminished proclivity to censorship, much stronger security features, and typically less frequent technical faults. Combined with ease of use, decentralized trading platforms come closer to the end users and provide an equally distributed control.
This article was originally published at 0xcert.org, and has been replicated here with express permission of 0xcert.
