The Bitcoin blockchain was created in 2008, in conjunction with the global financial crisis. As banks and big financial institutions were criticized for being reckless with people’s assets, Satoshi came up with a decentralized solution for currency exchange. The blockchain relies on a peer-to-peer technology and does not involve a third party as an intermediate to transfer value. The system is completely separate from the bank and relies only on the Internet. Decentralization is one of the main reasons bitcoin is so popular.
Yet, nowadays, a majority of cryptoasset trading platforms are centralized, which might seem to negate the purpose of a decentralized form of money. Let’s take a quick look at how centralized and decentralized exchanges work and their respective benefits.
Most crypto-exchange platforms rely on centralized technology
Centralized exchanges (CEXs) are online platforms providing third party technology to operate transactions between crypto or fiat currencies. Users do not own the private keys of the wallets securing their funds and the transactions are executed through a centralized server.
The greatest benefit to centralized platforms is trading cryptocurrencies with shorter delays and higher liquidity.
A relatively short pending transaction is the №1 reason why most users favor centralized exchanges. In order to generate a new block, each and every bitcoin transaction needs to be confirmed in the blockchain. For the sake of algorithmic security, a transaction requires at least 6 blocks to be confirmed. Since each new bitcoin block takes approximately 10 minutes to generate, at least 1 hour is needed before any transaction can be confirmed. With CEX technology, traders trust a third party technology with their coins to benefit from internal account transfers which are executed within seconds.
A high trading volume and a high liquidity are additional reasons. Until now, most of the exchange market has been based on centralized technology, therefore these platforms have a very large user base. CEXs have high liquidity making it easy to find a counterparty for any trades made.
In addition, centralized exchanges can support fiat payment, which is not the case with decentralized platforms.
In spite of these 3 main benefits (liquidity, delay shortening and the possibility to exchange fiat currencies), there is one problem with CEXs: they are much easier to hack than decentralized exchanges.
Decentralized Exchanges Imply Greater Security In Crypto-Trading
A decentralized exchange (DEX) is a peer-to-peer exchange, with users enjoying total control of their funds, and the ability to trade directly from their own wallets with on-chain settlement without the supervision of any central authority. Transactions can be executed on smart contracts and atomic swaps using what is known as Hashed TimeLock Contracts (HTLCs).
DEXs are less vulnerable to attacks because corrupting a peer-to-peer blockchain would require an exceptional amount of energy, which is discouraging to most. A group of miners would have to take control of more than 50% of the network’s mining hash rate to own the blockchain and embezzle funds.
DEXs are still in their infancy. They are not as user-friendly as CEXs. They do not offer as many functionalities, nor do they offer the same liquidity. But they do offer the level of security and transparency that the first 2008 bitcoin enthusiasts expected. Does this mean that all cryptocurrency traders should let go of their CEX accounts? Definitely not. A cryptocurrency trader should have it all: liquidity, low-latency and security. So how can he or she manage to accomplish this?
Centralized exchanges with decentralized settlement offer both liquidity and stronger security
A new generation of exchange platforms, combining the technology of a centralized custodial exchange with a decentralized “trustless” cross-chain “fair exchange” settlement might very well be the best solution. Users enjoy the efficiency of a low-latency, fully-featured centralized exchange when they need quick and liquid trading for exchanging big volumes, and they are able to turn to decentralized options if they feel like settling a transaction without the supervision of a third party, and thus, without counterparty risk. This will represent a big departure from traditional markets and a major step forward in the Internet of Value.
The Blockchain.io platform will combine a centralized custodial exchange with a decentralized “trustless” cross-chain “fair exchange” settlement. The centralized exchange will be low-latency and full-featured, with custody services, centralized order booking and efficient order matching.
The decentralized cross-chain settlement will be based on cross-chain atomic swaps, i.e. cryptographic protocols that allow users to settle transactions across heterogeneous blockchain networks without a third-party and without counterparty risk.
A credible cryptocurrency exchange must encourage trade while ensuring trust. A centralized exchange with a decentralized settlement will do just that.
A brief introduction to crypto trade
The global cryptocurrency market started 2018 with a bang, hitting a record high of $700 billion in market capitalization. All signs point toward an increasingly large cryptocurrency exchange market as new crypto traders continue to join exchanges.
In light of this, let’s take a look at the mechanisms of cryptocurrency exchange. In doing so, I’ll touch on the basic differences between the foreign exchange market (forex) and cryptocurrency exchanges, so newcomers to crypto trading can know what to expect.
What are the assets? Fiat and crypto currency are both considered money. Both can be used to purchase goods and services and transfer value, both are considered only as good as the respective systems that back them, and, of course, both can be traded on exchanges.
What are some main differences? Although cryptocurrencies are used the same way as fiat currency, they lack status as legal tender in many nations. This, however, has neither deterred several major international companies from accepting cryptocurrencies as money to purchase their products, nor has it affected the steady growth of crypto trading.
Of course, not being a legal tender means not being backed by a central bank or government, which in turn affects how we understand the value and use of these two forms of money.
A fiat currency’s value derives from a number of parts to a nation’s economic apparatus, including monetary and fiscal policy, workforce, goods and services, gold reserves, debt to GDP ratio…the list goes on.
Cryptocurrency’s value does not derive from an apparatus. Rather, it derives from a network, that is, the individuals distributing the coin. This is why Andreas Antonopoulos explains it well when describing bitcoin, for example, in saying that it is not so much money for the Internet as much as it is “the Internet of money.”
Concerning use, transactions made with fiat currencies, especially digital fiat transactions, grant central authorities access to an individual’s spending habits, whereas cryptocurrencies, being true to their name, grant anonymity to users.
So, if the value and transference thereof are different between these two forms of money, it would follow from this that the way in which we trade these currencies would be different.
For example, a central authority can by fiat — no pun intended — dictate the value of its currency. This is not possible with cryptocurrency. Their respective values are distributive in nature. For this reason, a crypto coin can trade at one price on one exchange and at a different price on another. This is due mainly to a lack of consensus on a coin’s trade volume, which can be larger or smaller depending on the exchange. Because the amount of coins traded on each exchange is only a part of the total number of coins in circulation, a consensus on the price of each currency is harder to gain — particularly without the involvement of a central authority.
Top 5 bitcoin trading prices, April 17, 11:50 am EST
To avoid the effects of varying prices, crypto traders tend to stick with one exchange market as opposed to trading assets across several exchanges through arbitrage, which is done with forex.
How do crypto exchanges function? Depending on the exchange, traders have the option to trade fiat to crypto, or crypto to crypto. When trading cryptocurrencies against each other, the top cryptocurrencies show a lack of correlation, meaning a coin can gain or lose value independent of others. This is another reason why crypto traders trade currencies on the same exchange, granting the benefits of each coin’s volatility (variation in price over time) by allowing traders to trade according to the likelihood of a coin’s independent gains on the platform.
Looking a little deeper into cryptocurrency volatility, bitcoin tends to have the least amount of volatility among crypto currencies, and can at times be used to gauge the overall rise and fall of cryptocurrency prices due to its longstanding as a cryptocurrency and its dominance in market capitalization.
Top 5 cryptocurrencies by market capitalization, April 17, 11:50 am EST
With differences in price, volume and correlation, newcomers to crypto trade should above all practice patience, which can admittedly be challenging given that cryptocurrency is exchanged 24/7 while forex only trades 24 hours a day between 5 p.m. EST on Sunday to 4 p.m. EST on Friday. If you’re unfamiliar with forex, you’ll have some things to learn, and if you’re familiar with forex, you might have to unlearn some things. The key is to approach the cryptocurrency exchange market understanding that while it bears many of the same traits of forex, it is a currency exchange in its own right.
Visit blockchain.io for more information and join our whitelist to become a part of the cryptocurrency exchange of trust on the Internet of Value!
