The State of Exchanges
Earlier this year, Binance announced their intention to launch a decentralized exchange alongside a public blockchain, claiming that centralized and decentralized exchanges will co-exist interdependently in the future as they complement one another. Over time, we may see centralized exchanges shift towards hybrid solutions that embody benefits from both centralized and decentralized solutions.
Vitalik Buterin, the co-founder of Ethereum, commented that hybrid and semi-centralized exchanges are a much better solution than fully centralized exchanges. Where one of the main issues with centralized exchanges is the influence they have over the market, with their ability to decide which currencies to list or not on their exchange.
The concept of a semi-centralized or hybrid exchange is to add components of decentralization to a centralized platform. In some instances, users are able to trade directly from their wallets with tokens deposited into a smart contract, before trading commences. This ensures that no third-party entity holds and maintains custody for user’s funds, thus reducing potential security risks.
Hybrid Exchanges: Combining the Best of Centralized and Decentralized Solutions
Neither centralized nor decentralized exchanges provide complete functionality allowing institutional and retail investors to trade efficiently in the market. Centralized exchanges (CEXs) have become the standard as they provide quick processing of orders (low latency), liquidity, high-frequency, alongside marginal trading tools.
However, while making trusted third-party optional is one of the fundamental benefits of cryptocurrency, centralized exchanges act as third-party intermediaries. This requires users to trust their cryptocurrency funds to be kept safe by centralized exchanges, where there is potential for manipulation, government intervention, and loss of funds through hackers.
In the past, governments have shut down exchanges. For example, in September 2017, China’s largest exchange suspended operations after a national ban was set up. Centralized exchanges also fall susceptible to hacks that have cost users millions of dollars on exchanges such as Mt. Gox, Bitfinex, Bitstamp or Coincheck.
Another issue is that centralized exchanges can engage in front-running; a process whereby an exchange inserts its own (or others) orders first in anticipation of big price movements. In regulated markets, such behaviors are regulated, illegal, and policed strictly, however, as the blockchain industry is largely unregulated, the potential for undertaking such questionable behavior remains.
Decentralized exchanges help to reduce the risk of front-running as there is no centralized order book controlled by a single entity. At the same time, decentralized exchanges (DEXs) allow users to maintain control and custody of their funds. However, because of a greater push for privacy and anonymity on DEXs, it is difficult to regulate and collect necessary information from users of DEXs.
DEXs do not hold cryptocurrencies or have a central ledger. This bars DEXs from offering efficient latency that would motivate larger investors to participate in these markets to provide more liquidity. Generally, DEXs have lower liquidity than CEXs because of lower users’ adoption and thus, lower trades occurring throughout the platform.
Blockchain.io as a Hybrid Exchange Alternative
At Blockchain.io, we offer the functionality, transparency, and liquidity of a CEX, alongside the security of a DEX.
We strongly believe cryptocurrencies will eventually become fully regulated in various forms, throughout different countries and regions around the world. Our philosophy on centralization is that we anticipate that upcoming regulatory changes will be implemented and so we want to ensure that we become one of the first exchanges that is fully compliant once they are put into place.
In the past, users have had crypto assets seized and funds frozen due to platforms’ lack of diligence when it came to regulatory compliance. We plan to be an exchange that remains compliant under all relevant AML and KYC procedures.
Additionally, our partnership with Paymium will provide a much-needed boost in liquidity from the almost 200,000 Paymium users being incentivized to trade on Blockchain.io, once the exchange has been launched. With the integration of atomic swaps for decentralized and secure settlement alongside a centralized order book, we aim to combine the efficiency of a low-latency centralized exchange with decentralized “trustless” cross-chain settlement.
By leveraging the latest developments in cross-chain cryptographic protocols, this will help overcome the scalability issues that face decentralized exchanges. And by integrating the best of centralized architecture with the best of decentralized settlement security, our solution positions us in Europe as a strong candidate that is ripe for onboarding all types of investors and participants, from institutional to retail traders, into the Internet of Value.