Centralized, decentralized or custodial — which is the best model for crypto exchanges?
Bit.Team is announcing the launch of a decentralized crypto exchange.
There are already more than 200 crypto exchanges and we must wonder why yet another one is required. Is there something that Bit.Team is offering that sets it apart from other exchanges, thereby warranting its entry into the market?
The team is certainly sure that they have come up with a solution to customers’ requests for an exchange that is simple, secure and fast.
Before we look at what they are offering, it might be useful to do a quick overview of what current exchanges have to offer, and what choices users have. This includes looking at the differences between centralized and decentralized and between custodial and non-custodial options.
Understanding the terminology
Centralized vs decentralized exchanges
Blockchain and cryptocurrency have at their core the concept that a central authority is not required to ensure safe transactions. So it’s somewhat at odds with this concept that so many exchanges set up to manage the buying and selling of cryptocurrencies are in fact centralized — they have a central authority,
A centralized exchange is run by a company that manages the transactions on the platform and earns revenue from them.
A decentralized exchange is set up by a company that provides a platform for transactions to happen, but the actual transactions are peer-to-peer and are recorded on a blockchain, based on consensus from distributed nodes.
Custodial vs non-custodial exchanges
A custodial exchange holds or has custody of the user’s funds. This means that the exchange has control of the user’s private key. The funds can be held together in one company account, or they can be held separately in individual user wallets. Trading is done off-chain and is tracked on the company balance sheet.
A non-custodial exchange does not have control of the user’s funds. The user has control of his/her private key, has complete ownership and is responsible for keeping the funds secure.
Custodial exchanges are most often also centralized exchanges.
· Binance, Bittrex, Kraken, Poloniex and GDAX are good examples.
Non-custodial exchanges can be either centralized or decentralized.
· Centralized and non-custodial exchanges include Shapeshift, Coinswitch, Evercoin, Changelly
· Decentralized and non-custodial exchanges include EtherDelta and IDEX
Pros and cons of different types of exchanges
Crypto exchanges are a key entry point for new and existing users of cryptocurrencies. They offer retail investors access to crypto assets, even if they have only small amounts to invest. But not all exchanges are equal, and users should do due diligence before deciding where to place their funds.
Here are some pointers.
Decentralized exchanges (DEX):
Which is the best type of crypto exchange?
All have both pros and cons. Users may choose more than one exchange. Perhaps they will use a DEX for new tokens or coins not yet listed on larger exchanges and a centralized exchange to trade fiat and crypto. It might be a good idea to use a custodial exchange for regular transactions — but don’t store your life savings there!
The Bit.Team exchange
The Bit.Team project is being undertaken together with Wallbtc, the developers behind a major exchange in the CIS (Commonwealth of Independent States) region. In a proposed merger, Wallbtc will bring 100 000 active users to the new Bit.Team platform, that is already a functioning product and at the beta testing stage.
As such, they bring experience in the market, together with an understanding of what users want: an exchange that is simple, secure and fast.
Some of the problems faced by traders that will be solved by the Bit.Team project includes the following:
· The impossibility of buying cryptocurrency directly. Traders are faced with fees ranging from 2% to 15% because they must first buy cryptocurrencies from an intermediary before they can even enter an exchange to embark on any trading.
· The complicated mechanisms of digital exchanges that may be acceptable to experienced traders but impede the development of the crypto community.
· The high risks of trading and the difficulty of buying or selling cryptocurrencies at an optimal price.
· The high costs of actually trading, with fees and commissions for deposits and withdrawals ranging from 2% to 8%.
They aim to solve these problems through several mechanisms.
In the first place, they are establishing a decentralized peer-to-peer ecosystem, where users can buy or sell cryptocurrency without intermediaries, in a confidential manner and at the best exchange terms.
There are high levels of automation and focus on simplifying buying and selling operations to cut time and costs. This includes mobile trading apps and an automated trading robot app (easy BOT). Instant notifications will be available in various messenger apps.
This is being supported by a “marketplace” which is an online resource that collects and systematizes information on goods and services associated with digital assets. The purpose is to help users to compare, choose and purchase assets.
Further support is provided by an online chat tool to allow buyers and sellers to deal directly with each other, and a special builder tool that allows them to set up non-standard deals.
There are a number of security level settings, and users can choose the level that best suits them. This includes optional 2-factor authentication, and limits on the size of transactions unless KYC and AML verification procedures have been complied with.
A unique security feature of the Bit.Team approach is their “blocked deposit” system. Cryptocurrency is blocked on the seller’s account until the buyer makes the payment, after which it is immediately transferred to the buyer’s account. The platform thus guarantees both the cryptocurrency and the payment.
Each trader will receive a rating on the website, based on the number of successful transactions undertaken. Traders can also leave reviews about others. A badge on the site will identify traders that can be trusted.
In addition, there will be a dedicated team monitoring account behavior (for example IP addresses used for accessing the site and actions in the account) to immediately detect suspicious transactions.
The discussion at the start of this article highlighted the pros and cons of different types of exchanges.
If these earlier definitions are used, then the Bit.Team exchange seems to be providing the best features of a decentralized exchange: peer-to-peer trading, no intermediaries, confidentiality, lowered fees.
It seems to be a hybrid of both custodial and non-custodial systems: while users remain in control of their private keys and their funds, the platform does provide an element of protection through the blocked deposit system and the application of KYC and AML procedures.
The Bit.Team is now working towards their ICO and the official platform launch before the end of the year. It will be interesting to see how well their ideas will resonate with potential investors and users.