The Paradox of the Crypto Scene — Can we patch things up?
The security issues on Centralized Exchanges are unbearable and the user-experience on Decentralized Exchanges is terrible. What now?
It’s paradox, that tokens, made to enable decentralization are almost exclusively traded on centralized platforms.
There has undoubtedly been a huge hype around blockchain and its potential for universal decentralization in the past.
Not only the intrinsic value of the blockchain was noticed, much more there was a boost of the extrinsic value of the tokens: The price people where suddenly willing to pay for the digital goods shoot up dramatically. And this rapid increase in demand brought new investors to the scene.
The whole excitement around blockchain also became the excitement of investing and trading — and that’s good.
But being the only real option for investors, digital currencies were and are exclusively traded on centralized platforms.
Why is this a problem?
Leaving all funds in control of the exchange poses a single point of failure and this puts all the users’ assets at risk.
The cryptocurrency thefts on MtGox, Shapeshift and Bitfinex resulted in the loss of the funds of millions of users, showcasing the genuineness of the problem and proving that the concept of centralized exchanges is fundamentally flawed.
Alongside the hackability of these exchanges, centralization leads to two further major issues:
- Even though users can, in theory, decide to withdraw their capital at any time, they have no influence on when their assets get transferred. This sometimes results in weeks of waiting time: The users essentially have no real control over their funds.
- Since most centralized exchanges are unregulated, they can run on fractional reserve. Also, they can flood their platform with non-backed tokens to manipulate prices: The exchange can do whatever it wants.
So, despite their huge popularity, centralized exchanges faced significant trust issues from their very beginning — and rightly so.
But how come no one bothers?
Out of sight, out of mind.
Centralized exchanges have become more and more accessible, offering fancy features and turning trading fool-proof, making the usage of their platforms for any and every one.
Centralized exchanges have gamified crypto investing.
Popular exchange platforms even started employing gimmickry elements, such as trading challenges — with prices ranging from in-house tokens to luxury cars.
Caught in a gold rush, the attention of most users was drawn away from the dangers and the manipulations in the crypto markets.
Even when exchanges suffered from hacks, they offered compensation — making the whole thing seem harmless.
Users were given a false sense of security- deceived, there was nothing to worry about and that’s what most people did: worry about nothing.
But there is a second, even more, relevant reason:
There is no real alternative
Aiming to solve the security concerns associated with centrally banked platforms, different exchange models either decentralized or eliminated escrow on their platforms. With this approach there are a range of issues that can be solved:
Any movement of the user’s funds can only take place when there is cryptographical proof, that the user wants to perform this specific action. This abolishes the danger of hackers or the exchange itself stealing the user’s funds.
Decentralizing escrow eliminates the risk of exchange platforms banking on fractional reserve, as the reserves of a decentralized exchange can be audited by anyone at any time.
- Proof of liquidity
Every trade the user initiates has to be backed before it is settled on the blockchain. This grants proof of liquidity.
Solving the security issues alone, however, does not seem convincing enough to get traders to switch to decentralized exchanges.
Next to a bad user experience, decentralized exchanges currently can’t compete with the feature-sets centralized exchanges offer.
Users don’t want to give up the high usability standards centralized exchanges have established.
Most decentralized exchanges
- don’t operate a matching engine, which makes trading fairly unpleasant.
- don’t guarantee trade settlement.
- don’t offer APIs to market makers and high frequency traders.
Also, the missing features and bad user experience are accompanied by high switching costs and learning effort.
Most traders don’t want to compromise and therefore knowingly risk their funds, staying on centralized platforms.
But this can’t be it, can it?
Like many others, we feel the current state to be untenable. Making decentralized exchanges more attractive and approachable is the essential figure in solving the security crisis and keeping users safe and protected.
There is no doubt a huge void between centralized and decentralized platforms. dex.blue assures to bridge the gap.
As a hybrid-decentralized exchange, we guarantee the security of the user, while still providing them the most convenient and advanced trading tools with a user experience so far only centralized exchanges can provide:
We, as dex.blue, stress this aspect, as we know it to be the single greatest cause for the failure of all decentralized exchanges, so far.
Making an exchange not only accessible, but user-friendly and intuitive is the only solution to the paradox we currently experience in the, so promising, crypto scene.
If you would like to test our beta visit our website.