One of the main goals of blockchain technology has always been to make crypto exchanges more open and less dependent on third parties. But as of now, the opposite is true: most of the top cryptocurrency exchanges are centralized.
How do exchanges that are centralized work?
All centralized cryptocurrency exchanges work the same way: they accept deposits on their wallets from users and let them trade assets as part of the deposit.
Usually, the process goes like this: the user creates an account, and verification is optional. Many exchanges (like Bittrex and Binance) limit how much and how often unverified users can buy and sell and how much they can withdraw each day. The user places a purchase or sell order for the cryptocurrency. Some exchanges, like Bitfinex, CEX, Coinbase, and Bitstamp, also charge a fee to make a deposit. When an order is filled, the exchange takes a trading fee. Once this is done, the user can move their coins to another wallet if needed.
So, the user pays a fee for withdrawing money, a fee for using the network, and a service fee.
Pros:
- You can trade with bots.
- More buyers and sellers for popular trading pairs.
- Orders are filled automatically.
- The interface is easy to use.
Cons:
- The exchange is a centralized system that can’t stand up to hacking attacks, government rules, or server hardware failures.
- Custody is based on the idea that users must give their money to third parties.
- When a user makes a deposit, the exchange moves the money to a payout (hot) wallet and/or a cold wallet. Because of this, a lot of crypto ends up in cold wallets. Through security holes, frauds can steal up to 90% of the money that users have saved.
- There may be problems with verifying transactions, keeping up with hot wallets, not having enough cash on hand, etc.
- Trading is done in already set pairs, usually BTC/ETH/USD pairs. Users must make at least two trades to change one coin for another.
- Withdrawal limits for users who aren’t verified.
- Taking coins off the list that aren’t very popular.
- Orderbook is not clear, and trading volume could be lied about.
Where are the coins?
Since Bitcoin’s early days, the market for cryptocurrencies has grown into a complex multi-blockchain phenomenon. According to data from coinmarketcap.com, the cryptocurrency market has more than 1,500 different currencies and trades more than 14 billion USD daily. We should also think about the size of the peer-to-peer exchange market, which is not transparent and is not regulated.
Almost every major exchange has had security problems in the past. The fall of the Mt. Gox exchange was one of the most upsetting failures. It took the exchange a year to get back on its feet. A person who doesn’t know what to expect might be impressed by the list of the biggest failures of custodian-based centralized crypto exchanges that are public knowledge.
The good news is that we can all gain valuable insight and make inferences from this experience. The lesson is that your money is not secure until you have the secret keys to access it. They are susceptible to being hacked and stolen by anybody, and once this process has been completed, it is impossible to reverse it.
The Atomic project (cross chain decentralized exchange) was made to respond to the current problems in the industry. It is a straightforward and adaptable decentralized solution that eliminates the need for a middleman in bitcoin transactions. The platform Atomic Wallet uses is built on a one-of-a-kind engine that was developed specifically for the company and its jobs.
Featured Image by Gerd Altmann from Pixabay
