The Future of Decentralized Exchanges: #ChangeYourExchange

Pick’n’mix.

We’ve heard from the disciples of Coinbase and Binance, the most significant and prolific exchanges in the crypto space, particularly in terms of their user experience (Coinbase), innovative development arm (Binance Labs) and regulatory approval (both are currently performing well in this area). We’re also aware of those who haven’t managed to escape the scrutiny of crypto media, scattering failed Stablecoins in their wake (we’re pointing at you, Bittrex). Let’s take a deep dive into the most effective, popular exchanges — exactly why they are so lauded? — before turning our attention to their competitors, lurking quietly in the shadows, waiting for their chance to enter the ring.

Coinbase — we’re not done yet.

There are a myriad of these, all collating themselves within the following areas: user experience, easy access for beginners, and seamless implementation of fiat currencies. Coinbase is apparently the go-to when it comes to your first crypto-related purchase: holding your hand, a comfortingly solid digital presence, as you take the momentous step from the normal and urbane to the wild and wondrous cavern of regulatory uncertainty. Jokes aside, Coinbase is known universally as the ideal beginner’s “online retail” gateway to cryptocurrency — as opposed to an active trader’s exchange. It’s certainly recognized for retail bank compatibility — to a degree, that is. Whilst initial Coinbase transactions are still flagged as fraud by certain retail banks, and transactions still take more than a day to fully complete, we haven’t yet reached a level of sufficient capability — certainly not enough to sit back on our haunches and declare victory. As a community and a thriving industry, we must turn laser beams of correction upon on one another as well as defending ourselves against the myriad of naysayers.

Binance — the uphill climb

Binance have a stock of plans, primed and ready to release in 2019 — one of the most interesting being their own decentralized exchange, which is part of their wider “Binance Chain” initiative, aiming to support any number of crypto assets. Prospective features include: a one-second block time for transactions, and — the mandatory selling point — the ability for users to control their own funds. Personal ownership of a private key should be a guarantee, not a concession — users need to be held to account, and if necessary, almost forced to control their own funds. It seems heavily ironic that, in our effort to purchase and fully own cryptocurrencies, we as users must be thwarted by the threats traditionally attached to centralized models: hacks, enormous swathes of lost funds, stolen or compromised information.

Freezing funds: HitBTC — why?

Most recently — as if to further illustrate the myriad of difficulties attached to a centralized, and thus inherently fragile, model: HitBTC moved to freeze all its customers’ accounts in readiness for a yearly “proof of keys” event. The customer, voicing his concerns through the erstwhile forums of Reddit, reminded the exchange of his successful passage through the know your customer process, including the six months’ compulsory waiting period for a trading account. A huge chunk of funds had been withdrawn, however, the customer remained in possession of a substantial amount in the public address used for intraday trading. Incorrect on the part of the exchange? Yes. A potentially catastrophic calamity in the general trade sphere? Also yes.

“After months of sending 40 plus emails, HitBTC finally unfroze my account.” (PEDXS, the afflicted user). Acceptable? Not in the decentralized half of the 21st century. Reviewer Harsh Agrawal was particularly vitriolic: “HitBTC was something that began as a promising crypto exchange and got lucky with the big crypto wave in 2016 and 2017, but it [definitely] failed to keep up with the innovation and user demands.” The crux. And the final punch to the gut: “They are barely surviving.” The expected result, when you turn a blind eye to the unceasing swathe of innovation required for an ideal user experience.

John McAfee aimed the most piercing barb of all: “The crypto exchanges have become the thing that we have originally fought against. Their power is immense. Boycott them.”

It seems heavily ironic that such venomous backlash and widespread dissatisfaction occurred in a rather botched attempt to increase the security of users’ assets and the network as a whole — through the “proof of keys” movement. Leaving cryptocurrency keys on an exchange may be risky, as billions of dollars have been stolen from them over the past decade. And this concern has formed the basis for the “Proof of Keys” movement, spearheaded by bitcoin podcast host Trace Meyer. The intention behind it is to check the legitimacy of the third-party disciplined wallets and put their solvency to the test, wielding clear-eyed scrutiny. The positive motives were there; the execution was not.

In essence, Bitcoin owners were encouraged to remove their holdings from exchanges and instead transfer them to a wallet that they can control. They are also then encouraged to spin up a full node, which contains the history of every transaction made on the bitcoin network.

Do you consider exchanges to be, in certain respects, centralised? Exerting a central-bank standard force across the death-defying heights of the crypto landscape, in the manner of Coinbase, Binance, Bittrex, Kraken — all who have suffered under some form of insult, some well-justified backlash, in response to the latest scandal plastering their names across the clapboards of Crypto Twitter. Exchange hacks, 90 of which occurred during the past 9 years — Mt.Gox, BitGrail, Coincheck — and, most recently, the Ethereum Classic double spend attack via Coinbase. Centralized exchanges an absence of defence against government bans, most of which only occur due to the centralised models they insist on using, Exchange owners maintain these structures in a manner of consistently wiping their noses with used tissues, tossing them into the garbage, then picking them out carefully to slather around their faces again. This defeats the original purpose of Bitcoin, cryptocurrencies, and distributed ledger technology as a whole. The further we progress along this trajectory, the more compromises begin to arise: we must maintain a degree of decentralization, or at least the appearance of it, but we can’t fully commit to such an awe-inspiring, momentous, essential concept without capitulating on the fundamentals. Conciliating with the very notion of a trustless entity — is this even a possibility? No — not if you consider yourself to be a true believer, or — who would have believed it? — a rational thinker.

Dexon — the Illustrious Newcomer

Dexon and Cobinhood — partners in crime. One’s the decentralized exchange backbone, the other serves the ICOs. COB will be bridged onto Dexon via an Interchain protocol.

Question: How does Dexon promise to positively impact the crater-filled landscape of exchanges? Answer: According to them, no DApp will ever again have to bear the prodigious burdens of “a lack of scalability, low transaction latency, and high transaction costs”. Sounds too good to be true? Apparently, it isn’t.

DEXON has grasped the elusive quality of infinite scalability through its avant-garde blocklattice architecture. (Blocklattice: Instead of processing blocks sequentially like a traditional blockchain, the blocklattice structure deployed by Dexon processes blocks in parallel, allowing for swifter transaction times, lower fees, and more advanced security levels. Two chains run simultaneously, both able to communicate with one another. Each block acknowledges the other, and each validator sees blocks in a different order.) The transaction processing throughput scales linearly with the number of nodes participating in the DEXON consensus algorithm. Additionally, once a node has reached its maximum throughput, it can scale out to an infinite number of shards in order to balance transaction processing loads, achieving a theoretically infinite, scalable transaction processing throughput. Dexon — as the tagline proclaims — is indeed helping to power the much-coveted, decentralized future.

Centralized v. Decentralized Exchanges

Let’s pinpoint the problems — why centralized over decentralized? There are equivalent pros and cons for both, weighing up each side of our psyches as equally as a rope ladder in stasis. Tread firmly in one direction, and you’ll propel the other side into a demented swing. Neither decentralized nor centralized exchanges are completely immune to hacks — however, for a decentralized exchange the risk of a debilitating hack is certainly lower, given the difference in architecture: distributed nodes providing the decentralized advantage. However, centralized exchanges have the edge when we consider the start of the seamless user journey: they facilitate direct fiat currency payment options, allowing users to exchange fiat currency for crypto and vice versa. (However, they definitely need to work on their payment compatibility.) Centralized exchanges also possess the advantage of higher liquidity and higher trade volumes, particularly due to their increased number of users, whereas — at this current point in time — decentralized exchanges have not obtained the same levels of liquidity and trade volume, due to their narrower user base. Governments are easily able to lay down the iron fist of regulation on centralized exchanges — which can act as both a negative and a positive. Sure, regulation is a fairly untamed beast, and can wreak a reasonable amount of havoc across business expansion plans and user experiences alike — however, those with the authoritative stamp of approval have usability and a lack of constraint on their side, along with the added perk of insurance, and a clearly defined physical location.

Stay tuned for the next installment in our #ChangeYourExchange series, where we dissect the benefits — and downsides — of different crypto wallets, and artificial intelligence driven exchanges.