What is a centralized exchange?
An exchange is a marketplace where assets are traded. One famous exchange you probably know of is the New York Stock Exchange, which is one of the largest exchanges in the world, and it is centralized.
It means that orders of stocks or shares are routed to the NYSE, London Stock Exchange (LSE), or any other centralized exchange, and are matched with an offsetting order. This means that all orders are taking place in one specific “location”, as they are all routed through the same place.
Say for example that you would like to purchase some Ethereum with your USD. In order to do so, you would need to transfer your funds (USD) to a centralised exchange (marketplace). After this, your USD would be converted by the exchange into Ethereum at the current exchange rate.
Centralized exchanges are good, they are easy to access and use, and provide advanced tools and trading functionalities such as margin trading, stop loss and lending.
Well, as it turns out, centralised exchanges pose a risk for your funds.
Maybe you’ve recently heard of people losing their cryptocurrencies and bitcoins due to hacking attacks.
Some people choose to keep their aforementioned purchased Ethereum – or Bitcoin – on exchanges, instead of transferring them to their wallets. This is mostly done for ease of access and for a quicker trade. Although this hacking and obtaining of others’ cryptocurrencies falls on the exchanges and the people who kept their assets on the exchange’s shoulders, we cannot disregard that we live in a digital world where most people and platforms are not safe from hackers, that is, if the hacker really wanted to get in.
There is, however, one solution. Decentralized exchanges.
Tell me more
A decentralized exchange is an exchange market which does not rely on third party services to hold one’s funds or assets. Here, trades are peer-to-peer (P2P), they occur directly between users, and the whole process is automated. So far there are two ways to go about this. One way is to create proxy tokens (an asset that represents either fiat or crypto currency). Another way is to use a decentralized multi-signature escrow system.
This creates a “trustless” system, where one does not have to entrust their funds to a third party (such as a centralized exchange). When one makes a deposit of funds on a centralized exchange, they are essentially issued an IOU, which they can later trade back for assets. With a decentralized exchange, one is able to stay in control of their money, and therefore be safe from hacking attacks.
Another advantage is that there is no disclosure of personal details, one can make trades anonymously using decentralized exchanges. These models are fairly new, and have yet to adapt the functionalities of centralized exchanges which have been around for a long time. Users might find centralized exchanges not so easy to use, and will not have access to features such as margin trading and stop loss.
Here are some already existing decentralized exchanges:
Waves Platform (www.wavesplatform.com) already has an in-built DEX (Decentralized Exchange), where one can trade BTC, ETH, USD, EUR and Waves.
Bitshares is another crypto platform, which uses its own native currency BTS.
Kyber is an up and coming exchange which promises “seamless payments from any token”. They are still in development and are planning to do their ICO (Initial Coin Offering) on the 15th of September 2017. You can check their roadmap and details here: https://kyber.network
0x is another decentralized exchange which facilitates peer-to-peer exchanges of ERC20 tokens on the Ethereum blockchain. These trades are executed through Ethereum-based smart contracts.
Etherdelta is yet another Ethereum-based decentralized exchange!
About the Author
Lawrence (follow me on Twitter)
“Hello! My name is Lawrence, I am originally Romanian, but I moved to the UK in summer of 2011. I am 19 years old, and currently studying abroad in Denmark, as I have been for the past two years. I have recently learned about this “crypto” world, and decided to give it a shot. What I mean by “giving it a shot” is to become an active member in communities revolving around cryptocurrencies, blockchain and bitcoin. Now, ever since I have found out about the possibilities of blockchain and crypto, I have become a full-fledged advocate of it! Seriously. Ask my friends. I think they must be getting tired of me blabbing on about Bitcoin. Last little detail about me; I LOVE writing! Articles, short stories, anything where I can put pen to paper and let it flow is my kind of gig. ”