Crypto Exchanges and the Need for Decentralization

Decentralization has been a characteristic that made blockchain technology alluring for a lot of individuals all over the world. With a total market cap of more than $390 billion, decentralization has been a focus of many blockchain projects today. In fact, exchanges are now looking to go after decentralization for a good reason.

Why Decentralization?

Any type of platform found online is considered hackable. This is especially true if there is poor security. Large-scale hacking occurs both in major banks and major exchanges. In fact, Bithumb and Bitfinex fell victim to this already.

In December 2017, Bithumb, South Korea’s second-largest crypto exchange held more than $6 billion worth of user funds at one point. It was also the same time when the entire crypto market dropped by around 50{4ede17fdd9b4ce8121d01fc4b54913fe84f8215aace504cc657695cefb5329ff} in valuation. And based on the current rates, Bithumb held around $3 billion.

On the other hand, you have Xapo, which is a Switzerland-based Bitcoin wallet and custody service provider that was able to store $10 billion in its cold wallets found in secured underground bunkers. If you will compare the amount of funds that banks handle, $10 billion can easily be distributed to 3,000 banks in the US.

For exchanges that handle a huge amount of funds from their clients, they usually make use of cold wallets or digital currency wallets not connected to the internet. However, this can be tricky since funds will usually will take more than 24 hours to process for withdrawal from cold wallets. And as we all know, 24 hours is already too long in the volatile crypto market.

According to Henri Arslanian, the financial and regulation technology head at PricewaterhouseCoopers (PWC) Hong Kong, he mentioned that many crypto traders often times prefer to use crypto exchanges for storage rather than cold wallets because of convenience. Unfortunately, centralized crypto exchanges can be risky in so many ways.

What Makes Crypto Exchanges Vulnerable?

So what exactly makes the crypto exchanges vulnerable? Centralized cryptocurrency exchanges are unsecure considering the private keys of user wallets stored within the centralized servers of exchanges. This means that during a hack, users can lose their funds and their private keys as well. This was the exact scenario that happened to Coincheck.

There are projects that have developed a decentralized trading platform in order to protect their customers. Kyber Network, 0x, and AirSwap are among these. However, the clients will still have full control of their funds.

But of course, there are still clients that are skeptical about decentralized exchanges. According to Matthew Leising of Bloomberg, “That depends who you ask. Sam Tabar, strategist at AirSwap, which opened a decentralized venue in April, predicts that traders migrating to the new model will be this year’s big crypto story. But others such as Chia Hock Lai, president of Singapore Fintech Association, say the new type of bourse have their own particular issues, such as an inferior user experience and lower levels of technical support”

Is a decentralized crypto exchange the future waiting for the crypto market? Now that hacks are becoming common and could affect a good number of investors, this could be a smart move after all. Even Litecoin is looking to make the cryptocurrency develop in a more decentralized manner.