Current State of the Cryptocurrency Exchange Market
Since the beginning of 2013, people have been investing in cryptocurrencies to profit from their growing value. The cryptocurrency market has grown sensationally, raising over $800 billion in 2018. The popularity of crypto investing has been conditioned by a growing increase in value. Bitcoin, for instance, has grown in value by 25,000% since 2011, while Ethereum’s value has skyrocketed by 2,700% in just one year. Taking into consideration other types of cryptocurrencies, their total value has gone up by 10,000% since mid-2013.
There exist different ways to invest in crypto. If several years ago it was pretty challenging, today, investors are provided with a full scope of options, including: centralized crypto-exchanges, decentralized crypto-exchanges, atomic swap technologies, and OTC marketplaces. Let’s take a closer look at the current state of the cryptocurrency trade.
Crypto-exchanges currently serve as hubs for performing crypto-trades. They can be compared to online banks and stock markets, where users can sell or purchase their crypto-assets without a checking account, as everything is digitized and supported by blockchain technology.
How to Choose an Exchange for Cryptocurrency Trading?
With a wide variety of cryptocurrency exchanges to choose from, one should consider their pros and cons to make a wise choice. Considering that each exchange has different purposes, it’s important to keep in mind its target audience.
When choosing an exchange for crypto-trading, one should consider aspects like:
- Reputation: Make sure that the exchange platform is trustworthy, as it’s going to be dealing with your funds.
- Fees: Consider the fees that the exchange charges for transactions.
- Payment methods: Clarify the methods of money transfer between wallets, as they can be coin-to coin, or conducted with the help of credit cards or wire transfers.
- Verification process: Find out the details about what kind of personal data is needed for verification, and clarify how much time it takes.
- Geographical restrictions: Ensure that the exchange you’ve chosen operates in your region and provides access to the features you’re interested in.
- Security: Ensure that measures are taken to protect your personal data to avoid identity theft and eliminate any illegal activities.
Centralized Exchanges
CEXs are the most commonly used today. Their greatest benefits are ease of use, popularity, speed, and efficiency. It must be emphasized that because of centralized dependence on authority control, users face certain difficulties. Additionally, centralized exchanges are vulnerable to hacker attacks, as they handle extremely large sums of money and are therefore potential targets for illegal behavior.
The main problem related to centralized exchanges is that they don’t provide user control over funds, and hold the full value until withdrawal. If anything goes wrong, an individual could lose his or her funds.
Decentralized Exchanges
DEXs have appeared recently to provide solutions to the above-mentioned issues. Decentralized exchange platforms operate without third-party involvement, and rely on smart-contract use to verify safe, secure transactions. This provides better speed, as centralized verification takes a decent amount of time.
Another distinctive feature of decentralized platforms is that they provide users with full control over their funds, and don’t require a deposit into an exchange dependent upon centralized servers. This provides user immunity to all kinds of hacking attacks and related regulatory issues.
The graph below outlines how decentralized exchanges work:
When a person wants to buy or sell his or her cryptocurrency, the buyer places a request in an order book from which the seller takes an offer, and a deposit transaction is published in the network. When the payments have been confirmed, bank accounts have been checked, and all conditions have been met according to the smart contract, both parties are satisfied.
Current Drawbacks of Centralized And Decentralized Exchanges
One issue related to centralized cryptocurrency exchanges, as mentioned above, is full dependence upon centralized governmental control. If a government decides to shut down a centralized cryptocurrency exchange, users can lose all their funds without a refund.
Centralized exchanges face the same issues as traditional banks and are open to threats, such as:
- control and regulations
- accusation in market price manipulations
- identity and funds theft
- charges of fraud and embezzlement
Additionally, centralized exchanges are vulnerable to exchange runs, meaning that a larger number of people can withdraw funds than an exchange is capable of paying out.
Decentralized exchanges have disadvantages, as well. They don’t hold cryptocurrency, and don’t offer a central ledger that contains trading orders. This eliminates the option to offer the latency and liquidity that motivates investors and users entering the crypto-market.
Additionally, it should be stressed that DEXs are not ready to be globally adopted, as they are still in the development stage. Though really good options do exist, there are still aspects to work on:
- resource duplication
- slowness at best-practice adoption
- difficulties in comparing performance across units
- difficulties in talent deployment across disparate units
Though decentralization appears to be a better option, compared to CEX, it still financially exposes investors to the possibility of a market crash. The amount of $500 billion was lost during March 2018 because of it. Additionally, current exchanges deal with an increased number of scams and fraudulent activities, which undermines investor confidence.
As scam ICOs mostly focus upon the cryptocurrencies themselves, all exchanges are vulnerable, regardless of the type.
Taking into consideration these problems along with limits in high-volume operations, investors are seeking new ways to securely trade their crypto-assets without third-party involvement, liquidity limitations, or speed issues.
What Type of Crypto Exchanges Will Change the Market in 2018?
By eliminating third-party involvement and governmental regulations, peer-to-peer (P2P) transactions are gaining popularity.
P2P is a decentralized way to exchange cryptocurrency values directly between parties. There is no necessity of paying additional fees to exchange companies serving as intermediaries. Consequently, interactions between interested parties are performed independently, and do not require middlemen.
The Advantages of P2P Trade
Commonly, to conduct P2P trades, involved parties sign a smart contract defining all conditions to be met. The seller does not receive his or her money until he or she provides his or her crypto-asset to the buyer, who correspondingly does not receive the asset until the payment is processed. Smart contracts ensure that both parties comply with their obligations, thereby providing full safety of transactions.
When P2P transactions are realized properly, they provide the following advantages:
- high transaction resistance
- privacy
- security
- cost efficiency
- easy usage
Ways of Processing P2P Transactions
There are different ways to conduct P2P transactions. One can use:
- peer-to-peer crypto-exchanges
- an OTC (over-the-counter) market
- direct transactions between digital wallets
- atomic-swap technology
The main idea of this kind of trade is to find a person interested in buying or selling his or her cryptocurrency and communicating with him/her directly to make a deal. P2P exchanges are not considered to be intermediaries, but their servers work to find the right person for trade. OTC trades are commonly conducted for large-quantity transactions and avoid market-price volatility, though one should keep in mind that OTC trades do require some extra work. Direct wallet transactions can be processed when users individually find their buyers or sellers, which can be done with the help of specialized blogs/forums and cryptocurrency meetups.
There also are advanced exchange platforms like Bdaq that offer free-flow liquidity solutions for investors. Bdaq is capable of processing high-volume transactions and is decentralized, offering instant liquidity, equal opportunity for investors, and zero delays. Find out more in the Bdaq white paper.
Atomic swap technology certainly looks like one of the best options for the future. It has recently been revolutionizing the cryptocurrency market by offering atomic cross-chain trading without intermediaries. Atomic swap works as a P2P transaction between parties, relying on time-locked contracts to ensure a trustless exchange process.
Considering the current drawbacks of the cryptocurrency exchange market, it is obvious that measures should be taken to provide higher security, independence, speed, and liquidity. It is hard to predict, but it certainly looks like decentralized operations are going to dominate in the future. With advanced development efforts, DEXs can offer interesting options, though P2P transactions offer the best solutions for liquidity and security issues.
