Apart from sudden regulatory action, one other thing that traders pay keen attention to is news of cryptocurrency exchange hacks. These events send shockwaves across the industry which can last several days. One of the latest attack affected the Bancor network. If you follow this industry closely, Bancor is supposed to be a decentralised exchange hence the surprise when it was hit by hackers.
This is the reason. Decentralised exchanges, unlike centralised ones like Coinbase do not hold customer’s funds. Instead, tokens are directly traded between customers.
Cryptocurrencies like bitcoin are decentralised because the process that goes into verifying transactions is outside the control of any single person or authority. The same process which is called mining also creates new bitcoins. In contrast, governments can simply print more money with banks often acting as third parties verifying transactions.
The case against centralised exchanges
Critics like Ethereum’s Vitalik are against the very idea of centralised exchanges. People like him argue that these exchanges negate the whole purpose of cryptocurrencies – to remove them from centralised control that characterises the current monetary system.
Staunch bitcoiners as they are called see the existing financial system as unfair and desire a situation where they have more control over economic decisions.
Other features such as anonymity attract a good part of cryptocurrency users. However, this anonymity feature and other advantages of using cryptocurrencies are often lost when one uses centralised exchanges. Because of regulatory requirements, most of them now require users to verify their identities.
But perhaps the most important disadvantage with centralised exchanges is the fact that they are vulnerable to attacks. The fact that a huge stash of cryptocurrencies are stored in one place is particularly attractive to cyber criminals.
A successful penetration into an exchange can be rewarding hence the high number of attacks. With the value of cryptocurrencies having gone up dramatically in the past year, the stakes are now even higher.
Exchanges mitigate this risk by storing some tokens in cold wallets, which are not connected to the internet. A lot is also invested in security. Even then, coins can still be stolen during transfers to hot wallets. This is not to forget the fact that staff can simply steal or misuse funds.
Why decentralised exchanges?
Which is why the idea of a decentralised exchange comes to mind. Under this arrangement, you remain in complete control of your coins even as you trade.
Exchanges are necessary especially when buying or selling coins. Although not exactly an exchange, platforms such as Bittylicious may be described as decentralised.
This peer to peer platform lets users send and receive funds directly between each other without any central control. This is achieved through a multisignature escrow system or through proxy tokens.
Decentralised exchanges still have the option of purchasing the traditional way for example PayPal to bitcoin. Certain tokens have special features that make this process smoother.
Disadvantages of decentralised exchanges
Decentralised exchanges however come with a few downsides as well. One of them is the speed with which transactions are done.
Because you sometimes have to rely on the other party to confirm, transactions can be slow. For traders, decentralised exchanges are not yet as robust in terms of features compared to centralised exchanges. Such important functionalities as stop losses are not present for example. Centralised exchanges also have advanced features such as margin trading.
Nevertheless, several decentralised exchanges exist and the list is growing.
Some well known platforms include BitShares, NXT, BitSquare and CounterParty. Binance, the leading exchange by volume for example is particularly keen on developing a decentralised exchange.
If the wave catches on, may be we can finally talk of having full control of our money in a truly decentralised infrastructure.