(De) centralized crypto exchanges: which one to choose?

Disclaimer: Please be informed, that this piece represents my view, aggregates data from various sources and does not constitute investment advice. Independent advice should be sought where appropriate.

Crazy 2017 in crypto

2017 witnessed a massive growth of the crypto market in a number of ways. Coinbase became the most popular app on iOS. ICOs raised $3.8 — $6 billion (depending on which statistics we take as well as depending on when the companies actually exchanged money to fiat currencies). Cryptocurrencies market cap rose by 3400% — from less than $18B in the beginning of the year to more than $600B in December. The number of daily transactions performed on the crypto market rose 240 times — from around $130M exchanged in 24 hours to more than $30B. (More in Consensys report https://media.consensys.net/state-of-decentralized-exchanges-2018-276dad340c79)

2017 was also a year of legal instability, with many regulators issuing warnings, SEC analyzing the DAO situation and hinting that it would classify tokens as securities. CME and CBOE introduced futures on bitcoin in December 2017 and marked the underlying asset as commodity. So even giving a proper definition to crypto turned out to be a problem (I also recently wrote about why it’s important in: https://hackernoon.com/cryptocurrencies-should-we-really-call-them-currencies-44a2f0ae5bc7)

How big is the market?

Cryptocurrencies’ market cap currently oscillates around $500 billion (with volatility from $700 billion in December 2017 to $350 billion in March 2018) whereas gold’s market cap oscillates around $7–8 trillion and stock markets between 60 and $70 trillion. That being said, there are many projects working on tokenizing various financial assets such as tokenized equity (Neufund, LAToken), tokenized gold (DigixDAO, Aurus), real estate funds (Brickblock, TokenState).

It’s interesting that token creators are trying to tokenize assets that are available on the financial markets worldwide, hinting that token technology might develop and overtake a vast majority of those markets and maybe even becoming the underlying technology (with the users not even being fully aware that the assets are stored on blockchain but enabling them to trade and own those assets via user-friendly interfaces). As for now tokenization mainly happens on Ethereum but there other platforms being developed that will enable tokenization and offer other important features, such as scalability. Amongst others, EOS (launching on main net in June 2018) Stellar, OmiseGO and NEO (operating).

Who is hodling crypto?

Both individuals and institutions invest in cryptocurrencies and the underlying blockchain technology. According to the Coinbase Q4 2017 report amongst individuals 89% are not accredited investors, 86% owned over 3 crypto assets, with 97% male investors.

Also, institutional investors are making moves in the space. George Soros has invested in a company enabling payments in cryptocurrencies but also developing blockchain products for the retail space as well as blockchain development platform for capital markets. AQR hedge fund ($208 bln under management) has announced that it will begin investigating how to incorporate blockchain technology into its trading platforms. And more than 120 hedge funds have opened for cryptocurrencies, one of them amounting to $500 mln being led by Galaxy Investment Partners founder Michael Novogratz.

In January 2018, Amplify launched their blockchain ETF called the Amplify Transformational Data Sharing (BLOK) fund. It started with $2.5 million but on its very first day it grew to approximately $40 million. In the same month NYSE applied to SEC to launch 5 ETFs on bitcoin.

So it seems that both retail and institutional investors saw the potential of crypto in the past year.

How many crypto hodlers are there?

Despite increasing interest in cryptocurrencies, its difficult to estimate the number of global users. Crypto asset exchanges are not public companies so they do not need to disclose such data. In order to know how many people are invested in cryptocurrencies we need look at various sets of data and make an educated estimate. When it comes to the amount of users of the Ethereum blockchain itself it’s not easy either. In March 2018 Ethereum reached 29 million generated addresses (which is a very quick growth from November 2017 figure of 10 million). However, as many users have multiple addresses it is possible there are between 5–10 million people invested in some way in Ethereum.

Evidence from new user registrations on popular exchanges indicate that despite a significant loss of market cap from the all-time high in early January, new users have not been deterred by the fall in price and are signing up in heavy numbers. However, transaction count has fallen by around 50% since these highs, but this is probably influenced by lower trading volume.

One of the largest cryptocurrency exchange in the world by volume, Binance, added 240,000 users in just one hour on Wednesday Jan. 10 2018, surpassing all previous growth records. Other exchanges, such as Poloniex and Bittrex, introduced temporary halts on new user registration as they are unable to cope with surging demand. Coinbase, the most popular platform for buying cryptocurrency, has over 12 million accounts, while the popular Ethereum and ERC20 token wallet MetaMask has over 1 million users.

The success of exchanges is seen as a general sign of growth in the market, and increasing adoption. Gregory Van den Bergh, co-founder and CEO of MiCai, a Blockchain based wealth management firm, said:

“We are just at the early stage of the crypto adoption curve … crypto exchanges are still serving the crypto early adopters. The next phase of adoption will come from the 30 trillion dollars that is currently actively managed on behalf of high net worth individuals across the globe.”

Where can one get crypto? Aka crypto assets exchanges

Up to date close to 200 exchanges are present on the market with distinctive models: centralized (such as Kraken, Poloniex, Bitstamp, Gemini, Bitfinex), decentralized (EtherDelta, BitShares) & open protocols (Open Relay, Enigma Protocol, OmiseGo, Swap Protocol) and hybrid ones (where e.g. order books are kept off chain thus on centralized servers, e.g. Idex).

2017 saw a rising number of decentralized and hybrid exchanges, especially thanks to the appearance of the 0x protocol, with the current count of around 55/195 exchanges. However, despite decentralized exchanges gaining momentum, it’s still the centralized exchanges that dominate the daily trading volume. Bitflyer, Binance + OkEx are each responsible for 13–15%; Upbit + Huobi for 8–10%; Bithumb, Bitfinex, Bitrex each account for 3–5%. The largest decentralised exchange by volume, Idex, accounts for less than 0.05%. In total, decentralized exchanges account for less than 1% of the total trading volume of crypto assets today. That being said in the near future, decentralized exchanges are poised to take increasing market share away from centralised exchanges.

The architecture of decentralized exchanges means there are significant advantages for users:

• Global (no need to exclude any country)
• Open and transparent (as the transactions happen on the blockchain you can trace them)
• No need for registration or verification (there’s no verification process, because everything happens on the blockchain, the exchange isn’t in possession of the assets at any time)
• Security (decentralised exchanges do not hold user funds so hacks as know them from centralized exchanges won’t happen on a decentralized one)
• Anonymity
• Accessible order books — independent entities can build on top of them to improve liquidity (Currently 0x project is at the forefront of pooling liquidity through combined order books, and there are also various financial instruments (like Leondrid) being built of top of this protocol)

And current disadvantages of decentralized exchanges include:

• no fiat-crypto trading (so one needs to first own crypto to use them);
• poor UI / UX;
• no user-education (since they operate differently than traditional stock exchanges or decentralized exchanges, users must take extra precautions when using decentralized exchange);
• low liquidity.

At the moment and in the nearest future it seems that even if decentralized exchanges grow very fast, centralized exchanges will still keep their primary function — letting users enter the crypto world by converting fiat to crypto. Once the user goes through this step it’s easier for them to change to other exchanges (also decentralized) as the vast majority of coins and tokens can only be bought with Bitcoin or Ether (and not fiat).

Centralized exchanges also have some other advantages:

• Easy to access & use (their interfaces are just much easier to operate than those decentralized ones);
• Large pools of liquidity;
• Advanced tools for trading functionalities such as margin trading, stop loss and lending.

Of course there are some disadvantages of centralized exchanges:

• they hold users’ money (so users need to trust them & they can be hacked);
• all transfers happen outside the blockchain (so tracking for a user is impossible);
• lack of transparency (fees are hard to compare; they can operate under different jurisdictions and can close at any time);
• illegal and manipulative practices (e.g. front-running, wash-trading are possible)

Nevertheless, there are projects already working on making it possible to skip centralized exchanges by enabling fiat to crypto conversion via a protocol (e.g. by integrating a bank API required by PSD2 Directive and treating it as an oracle that fiat has been sent to release coins from the smart contract) or by peer-to-peer transfer (eg. localbitcoins.com).

These technological developments still lack a defined legal structure (tokens don’t have an explicit legal standing as of today). However, 2018 will likely provide a bit more legal clarity with further instructions and interpretations from the regulators, with the SEC issuing a statement on platforms trading digital assets or FINMA issuing guidelines on ICOs. Even though I am a lawyer by degree, I am not going to discuss this further here as it’s a topic for another massive article.

So how do I choose an exchange for me?

What is also relevant is that individuals use multiple exchanges and wallets from several providers at the same time. This helps ensure security of the assets, as there is not necessarily a single point of failure and risk is spread (eg. hot and cold wallets). There is currently no multi blockchain compatible wallet that supports all digital assets (e.g. Ripple has only few wallets that support it). Another reason is users (especially traders) want to be able to react fast to price changes so they might non-trivial amounts on exchanges. And some will want to quickly exchange their crypto to FIAT.

For example, Coinbase — one of the most popular on-off ramps for Bitcoin, Ethereum & Litecoin — has over 12 million users. However, many Coinbase users would also use various other exchanges and dedicated wallets in order to store and transfer their assets, as well as to purchase ones not offered by Coinbase because each exchange offers different trading pairs and offers different liquidity.

So it seems that today crypto investors use several exchanges at once as each of them offers a different advantage to them — one will be a great gateway to the crypto world, another will have an unusual pair they have been looking for, another one will offer additional instruments and yet another one will have rare and low liquidity assets. In the end the users needs to go where their need is fulfilled.

If you can’t choose one, don’t worry. Just pick the one that satisfies your needs and stay with it.

Until it doesn’t.

P.S. And why is it relevant to me?

Cause me and my team are building Trivial — a tool to discover, research and (in the future) invest in crypto assets.

So what can you do with Trivial at the moment?
You can search for interesting tokens:

1. You can do it by browsing the categories you fancy — e.g. GAMING or PORN or VR.
2. You can use the option ‘Find user’ — and type in the tokens you like and see accounts with those tokens. And then you can check what other tokens they have — doing kind of a shortcut in your discovery process.
3. You can then add the token you like to your ‘favourites’ and get updates — get a kind of a ‘Facebook feed for tokens and your friends’ (if you tag their accounts)
4. And many more ways that I let you discover for yourself.

As we’ve released the tool only a few weeks ago and we’re in Beta, we are hungry for feedback so we can make the tool better for you. And make token discovery trivial at Trivial.co

About me: European lawyer by degree, briefly flirted with the corporate world and moved to startups to discover the worlds of digital health and now blockchain. Co-founder & CEO of Trivial.co: a tool to discover and research your next favorite token.