The title of this topic may seem a little incoherently recitative at first, but those connected with cryptoworld know this problem far too well.
- how and why CEX (centralized crypto-exchanges, such as Binance and Coincheck) became a part of decentralization holy grail - blockchain and cryptocurrencies
- why DEX (decentralized projects - AirSwap, KyberNetwork) are still not widely used in the cryptoworld.
I prepared the article below to start a discussion about cex and dex, because the problems is quite serious and i haven't found the normal answer for it To begin with, even if take note of how rapid the development of the present world is, the world of crypto is still very young. Such “out of nowhere” outburst caused a so-called "childhood disease": the market is huge and continues to grow but the problems that should have been solved in the early stages of development haven’t gone anywhere (just like you can die from a simple chickenpox if you get it later in life instead of your childhood). This means all the well proven in retrograde stock markets mechanisms migrated to the cryptoworld; centralized crypto exchanges mushroomed, yet blockchain stil does not have even close the amount of rules traditional economy has, hence the fraud, manipulation of currency rates, hacker attacks and other attributes of the digital "wild west". Thus, at the initial stage of crypto development all the centralized exchanges were justified: the market "exploded" and traders simply forgot about many important points that surfaced later.
For those preferring to stay completely anonymous, CEX proposes another problem called KYC (or the "know your customer" principle). Not taking legal and moral aspects into consideration, let's just say that classical structures such as Binance, Bittrex, Bitfinex, Okex, Poloniex, Kraken, Hitbtc already faced a problem of customer verification. Being under governmental pressure, they urge to know who you are and where your money come from. That's not news for the Fiat-world as everyone is already used to it, though it did temporarily postpone the creation of a tax-free crypto, where temporarily sounds more like forever. It would be quite naive to think that officials will close their eyes to rapidly growing digital assets.
Moreover, living in the Fiat-world, we use it daily one way or another (including crypto purchases). Therefore, good or bad, rules are rules, and they should be respected.
Everyone understands that state authorities want to control crypto market, but it is an explicitly difficult technical task, except maybe if the do so through the one indispensable attribute of any market - a trading and intermediary platform or centralized exchanges in our case.
To sum it all up, here is a list of the main CEX shortcomings:
- In reality, crypto-active assets are usually stored on the exchange itself, putting them under a great risk of fraud, abduction, etc. (examples of such crimes appear daily)
- The existence of "centre" allows to manipulate the rates, as it happened with some FX-platforms. In other words, you may not be allowed to "win".
- Both administrative and financial centres depend strongly state political decisions. The funds can be frozen (as in Poloniex's case) and exchange suspended or shut down altogether (remember Binance relocation to Malta)
- CEX user verification is inevitable.
- That being said, the government most likely, will not ensure "security" for crypto-active assets (as is the case with banks and stock markets), believing that this is not their business and doing so rightly.
You might say: Okay but why then decentralized cryptographic exchanges (DEX) still have not driven CEX-whales out of the market? And which problems can they solve?
Here is where we face another reinforced concrete laws, this time in a form of cause-and-effect relationship. In order to function on a large-scale, exchanges require liquidity, but without mass - there is no liquidity. So what's does it make it: a Möbius strip, a dead end? Not really. DEX, for example, can negotiate a partnership with financial giants like Goldman Sachs, Merrill Lynch, JPMorgan to provide assortment and volume of applications to the site (for a negotiated reward). An excellent example to ensure new technologies operability by using your resources.
The second key issue is blockchain scalability. Even the crypto world's brightest minds couldn't fully solve the problem and as a consequence, transaction speed decreases with network growth. Idex, Binance, Huobi are working on this, Binance and Huobi are investing $ 100 million each to build their own blockchain. And we...We wait!
The third obstacle in the way of DEX integration is Fiat's limited use for transactions. This is what's rightfully called a reverse of the medal: not using KYC will get you paying for everything. All transactions must be carried out in some cryptocurrency. Although the Waves project solved half of the problem or did it fully but in their own way: if you want to work with Fiat, you have to get verified, but if you want to remain anonymous, it's your rightful choice to do so.
Now get ready for the punchline. The openness of the platforms and their source code inflicts a neverending curse of the need to constantly be ahead of the game. Any bot is able to track applications and offer miners greater rewards for verifying its transaction, gaining an advantage over other traders. This concerns blockchain as a whole with DEX as the main scapegoat. Oh, yes, almost forgot, Kyber and Paradex have already proposed solutions to this problem.
Much like everyone else traders quickly get used to good, but in case with decentralized platform margin trading, stops, limits and other "shenanigans" will have to be forgotten leaving the bare minimum of functions.
Either way, decentralized sites exist and work just fine. Github has recently uploaded«inDEX» - the longest list of projects worthy of attention. Yes, they also have a number of shortcomings, but the industry's development speed allows to think that these problems are rather temporary.
Both types of crypto exchanges are decentralized and not, having both advantages and disadvantages. CEO Binance might have been right predicting that hybrids are the future. They are safe and convenient for both trader and investor retaining all the advantages of DEX but allowing Crypto Currency Security Standards to be long gone and forgotten.
Though, what turn cryptocurrency development will actually take only time will tell.
