A centralized exchange is a trading platform for buying and selling or converting assets via a single location or service. As they are centralized, there have been a lot of problems with them since the very beginning.
Types of Crypto-Exchanges
We can distinguish several basic types of crypto-exchanges:
- Platforms that do not support input and output of fiat assets, but work with cryptocurrency pairs only (e.g., Poloniex and Bittrex);
- Micro-exchanges that also do not support fiat, but deal with new tokens of different ICOs and a couple of common cryptocurrencies (e.g., CoinExchange, C-CEX);
- Crypto-exchanges of the initial level, working with the most famous cryptocurrencies exclusively and not supporting work with FIAT (e.g., Bitstamp, Lykke);
- “Universal” exchanges that work with both fiat and crypto-currencies (e.g., Bitfinex, Bithumb);
- Combined crypto-exchanges, which represent all possible combinations of the variants presented above (e.g., hitBTC, YObit.net). The functionality of these exchanges is still limited. They don’t provide sufficient opportunities for the needs of “players” accustomed to the functional diversity and reliability of solutions from the world of finance.
Such a variety of options is further aggravated by the fact that each exchange operates in its own way. The decisions applied to such exchanges can be called artisanal. There are no functional tools available. If principles are proposed for implementation, they either do not reach the final stage, or competitors appear, creating their own standard or protocol. For a specialist accustomed to the precise rules of the financial market, working in such conditions is extremely difficult.
Current Problems of Crypto-Exchanges
- Lack of serious solutions that would ensure trouble-free operations of large market participants able to invest significant sums
- Absence of laws and regulations for crypto-exchanges
- Security issues (fraud, theft of cryptocurrency from wallets, theft of personal data)
- Insufficient liquidity
- A small number of productive APIs
- Technical problems due to the low capacity of the infrastructure and the vast amount of transactions, which crypto exchanges won’t stand
- Lack of analytical tools familiar to financiers
- Amateur (in most cases) interfaces of cryptocurrency software tools
- Slow processing regarding the input and output of funds
- Insufficient support teams
- A small selection of trading tools
The situation with crypto-exchanges is very inconvenient for large players, who keep entering the market but are unable to overcome most of these problems. And market players who are involved in the field are forced to deal with an unreliable industry and use non-transparent solutions without proper functionality.
At present, crypto-exchanges of any size are the only product of choice without the opportunities necessary for larger players, as mentioned above. It’s possible for an individual user to work with these tools, but not for large brokers or, especially, for institutional clients. The infrastructure of these exchanges will simply not handle the number of transactions needed for these types of clients.
There is one more problem. The majority of crypto-exchanges are centralized systems, which are almost non-transparent to participants. This neutralizes the key advantage of blockchain and cryptocurrencies; decentralization.
Moreover, centralization makes it possible for the administration of crypto-exchanges to perform not-quite-legitimate actions. Evidence of this is the constant cumulative losses of the crypto community due to various incidents of fraud and cyber attacks, estimated at about $5 billion. Naturally, security problems raise doubts about the ability to work with the current crypto-financial instruments of major players in the traditional financial market.
Now, let’s review some of the best decentralized exchanges we can use for trade:
- IDEX is an Ethereum-based decentralized commission that allows trading of ERC20 tokens. It utilizes smart contracts for managing users’ private keys, and, subsequently, allows trade in a safer environment, within a single ranked network. Considering its volume, it’s one of the most efficient exchange commissions on the market.
- OpenLedger, a Danish company built on blockchain technology, provides decentralized platforms for the cryptocurrency market. It is the world’s first conglomerate built on the blockchain, using BitShare technology and supporting an ecosystem that includes the services of the OpenLedger DEX exchange. Its goal is minimizing client risk while maximizing investments.
- Waves Dex is a fully decentralized crypto-exchange supporting several popular cryptocurrencies, such as Waves, Bitcoin, Ethereum, Litecoin, Zcash, Monero, Bitcoin cash, and Dash, as well as fiat money. This platform allows anyone to create a personal token in just a few minutes. As soon as it is created, it is automatically added to the Waves Dex, where it can be exchanged into any other cryptocurrency (supported by the system).
- CryptoBridge Dex supports the trade of the most popular altcoins. It securely stores all clients’ private keys. The main innovation of this system is the elimination of a single point of failure when trading cryptocurrencies. CryptoBridge’s target audience is altcoin traders who use centralized cryptocurrency exchanges (which have many operational problems and can be exposed to theft, manipulation, hacking incidents, or government takedowns).
Who Is Guilty?
It can be confidently asserted that the work of these exchanges has been influenced by a sharp increase in transaction volume. It is reported that the total trading volume of Bitcoin varies from 1 to 5 billion dollars a day. However, this is not so much when compared with the volume on institutional exchanges that operate in the trillions of dollars.
If you go to the site of the Federal Bureau of Consumer Protection of the United States and enter in a search for Coinbase, it immediately becomes clear how many customers are not only unsatisfied with the work of the exchange, but have also complained to legal authorities.
Speed plays a big role in the sharp growth of crypto. Having missed one day of trading, a potential investor may lose thousands of dollars.
In fairness, it should be noted that almost all exchanges face problems. This may be due in part to KYC/AML procedures. In addition, traditional bank accounts are also involved in the withdrawal process, and financial institutions, for the most part, are not enthusiastic about cryptocurrencies. Bitcoin veterans prefer to rely more on P2P-exchanges than ordinary exchanges.
Conclusion
It is possible to solve the problems mentioned above by combining the merits of centralized systems of the traditional financial market with the advantages of decentralized chains of blockchain, which cannot be doubted. In this case, crypto-exchanges (subject to legislative regulation — this should also not be forgotten) will be deprived of their shortcomings and will no longer be a niche, but a universal tool attracting really big players to the market.
We shouldn’t be pessimistic, however. The crypto industry itself is very new. All of its problems can’t be solved in one moment. With constantly-growing public demand and interest in cryptocurrencies, we believe that exchanges will adjust their regulations to make exchange platforms more secure and user-friendly.
