Why Does a Crypto Clearinghouse Make Sense?
With a rising demand for exchange services within the crypto sphere, the process of clearing transactions is often overlooked or unnoticed. For those who are not clear on the clearing aspect of trades, simply put, in the traditional finance industry, clearing denotes the process of a trade subsequent to matching of the order. When a buyer and seller agree to terms on a stock, for example, a clearinghouse will then clear that particular stock before it is settled. The clearinghouse steps in between the buyer and seller, and guarantees the deal from the exchange will be fulfilled.
Other than clearing trades, they are responsible for reporting trading data and settling trading accounts (all under the same separate entity). The point to note here is that clearinghouses are a separate party that step in to ensure stability and efficiency for the market, and exchanges are reliable for bringing market liquidity and running the engine of matching trades between buyers and sellers.
Current State of Crypto Trading
According to Coinmarketcap and other websites that report trade volume from exchanges via API, it’s common knowledge that centralized exchanges are widespread and commonly used for trading cryptocurrencies. As the industry becomes more established and aims for regulation, a change of infrastructure for how current centralized exchanges operate must certainly be in the pipeline.
Currently, centralized exchanges take on the responsibility of delivering several tasks they should not have the authority to do. Similar to the traditional financial industry, exchanges should simply be a gateway for placing orders and matching trades for their customers. However, they do much more than that.
This leads them to trust and reliability issues from traders who use their platform.
Playing the role of an asset custodian, centralized exchanges store and hold a pool of their customers’ assets in their own hot/cold wallets. It is obvious that the main problem here is that with this arrangement in place for storing cryptocurrencies, they become a huge target for hacking groups. Several exchanges have indeed become victims to hacks because of this. Mt.Gox and Bitfinex are famous examples of exchanges that have suffered from attacks that resulted in the loss of hundreds of millions of dollars’ worth of cryptocurrencies.
When cryptocurrencies are traded on a centralized exchange, the traders are essentially issued IOU tickets that the exchange “guarantees” to owe them upon withdrawing the funds to a personal wallet. These IOU tickets could worthless if the exchange suffers from a hack or crash that disables it.
In addition, the accounting information for all trades they clear internally is not public, which makes it very easy to manipulate. This adds another layer of risk to the trader.
A Crypto Clearinghouse
The DAEX ecosystem will provide an infrastructure for centralized exchanges to publicly record clearing and accounting information on a public chain (the DAEX Clearing Chain). The DAEX Wallet will be deployed for exchanges/institutions and individuals to take part in the clearing process of trades, and will provide a secure method of storage for multiple digital assets.
By recording and displaying accounting information on a public chain and deploying the DAEX Wallet, the aforementioned risks centralized exchanges bring to traders will cease to exist. Traders will not have to rely on centralized exchanges for holding and storing their funds. They will be able to access their digital assets via the DAEX Wallet using their own private key.
With this setup in place, exchanges will not be a target for hackers because they will not store a pool of their customers’ assets in hold/cold wallets — the assets will be distributed and owned by the traders themselves, just how it should be.
This infrastructure will replicate the model of clearinghouses in the traditional financial industry (which are regulated and established entities that play an important role in the exchange of assets) for cryptocurrency trading. In fact, it will be a more secure and reliable model because of the utilization of DLT and smart contract technology.
Custody solutions for institutional investors are a common topic that frequently come up in the cryptocurrency space. There is speculation that institutions are not entering the marketplace due to the lack of secure custodian services that exist. By providing a secure vault (the DAEX Wallet) for institutions to store and invest digital assets, DAEX aims to remove this barrier and allow digital assets to be safely stored in a secure environment.
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