Centralized Custodial exchanges will be dominated by Non-Custodial Exchanges

[Haldor]

If you have ever traded on a cryptocurrency exchange, high chances are that it would be a centralised one. Name any famous exchange and there is a 99.99% chance, it is a completely centralised closed loop exchange.
This means that you deposit coins into a BANK that is not regulated and your funds are not protected in case of hacks...

Take a look at how blockchain technology will shape the future of non-custodial derivatives trading:
https://bbod.io/post/non-custodial-solution-bbod

Types of crypto exchanges:
1. Centralised, custodial

• very fast and user friendly
• all the operations are performed on the exchange's servers
• you need to deposit coins to the exchange's wallet which is controlled by the exchange in 100% (by holding private keys)
• the clients' funds now belongs to the exchange... so you lose the ownership of your funds completely
• you need to trust the owners of the exchange that they will accept your withdrawal request
• examples: Binance, Bitmex and +1,000 others

2. Centralised, non-custodial

• very fast, safe and user friendly
• all trading operations are performed on the exchange server
• a client funds are stored in a personalised contract accounts on e.g. Ethereum blockchain
• a contract account has an ether balance and has associated code but the private key are not stored on the blockchain (not accessible for hackers)
• the security is guaranteed by the Ethereum blockchain
• examples: BBOD, Digitex

3. Decentralised exchanges

• very slow, safe and bad UX
• almost all operations are performed in the blockchain
• you keep funds in your private wallet - you hold the private keys
• the security is guaranteed by the blockchain
• examples: EtherDelta

An example of Centralised, non-custodial exchange:

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[cphzt]

This means that you deposit coins into a BANK that is not regulated and your funds are not protected in case of hacks...

Good point but not all centralized exchanges are non-regulated, look at Gemini for example.

[Haldor]

but it does not mean that in case of hack your coins are protected, you may not give back your funds.
at bank your fiat deposit is protected by a government guaranties

so it is natural to use a blockchain technology to self-protect funds

[CryptopreneurBrainboss]

What gives you the impression that non-custodial exchange will soon dominant centralized exchanges, when decentralized exchanges still couldn't achieve that. What are the chances of them succeeding? Put aside security (as they don't hold your coins for a long period of time) and anonymousity (as you don't have to create an account to exchange your coins), what else can they offer in regards to equipping traders, trade better. They're only useful for instant trade which attract mostly investors wanting to sell their coins quickly. They don't offer much in regards to equipping a full time trader (who're backbone of the market) and don't have advancing trading tools that's why centralized exchanges will still leads the exchange industry.

The only type of exchange that can dethron centralized exchanges are decentralized ones although not with the currently ones we have, they still need further development/improvement.

[Haldor]

Hi CryptopreneurBrainboss,
It looks like you have not read the article or/and you do not understand that a non-custodial exchange is not the same as fully decentralised exchange.
You can have combine non-custodial solution with high speed trading system for derivatives trading with one deposit currency e.g TUSD.

The non-custodial part is managed by smart contracts (coins are held by Contracts Accounts,) and the smart contract performs autonomously a daily settlement of profit and loss from trading. The key part is to have audited the smart contract system by a reputable company (e.g. PWC).

The rest part of the system is centralised...like at your favourite exchange.

[cryprochiloutman]

I don't get you guys. Decentralized/centralized. Centralized = hot wallets = risk of lose your cash, decentralized = cold wallets = double fees = no fast exchanging = costs, costs, costs. Where is the point of success? What exactly can be better?

[Haldor]

Non-custodial exchanges with centralised matching engine (hex) are cheaper than decentralised exchanges (dex).
This is due to the fact that at DEX EtherDelta you pay gas for each tading action, like send order, cancel order, execution, etc.
At HEX, like BBOD, you make only one payment during a daily settlement.

[mk4]

Centralized exchanges would probably indeed be dominated by non-custodial exchanges in the future, but soon? Not so sure about that. I couldn't count how much non-custodial exchanges or "DEXs (lol)" have been released already, and none has ever beat the ease-of-use and the high liquidity of existing centralized exchanges.

Though this certain exchange claims that they have a "state of the art matching engine", I don't know. I'll believe it when I see it I guess.

[SquallLeonhart]

There is no one doubting or arguing that most trade are done over centralized exchange which we all know and accept this, all these famous exchanges you talked about like Binance, Huobi, Polenix, Bitfiniex, Bitmex and many more too didn’t deny that the exchange system they developed is a centralized one, there are so many decentralized exchange that we have an d I mean real decentralized exchanges, but we are the ones that have not really encouraged them

Few are those people that do patronize dex and which is why they have very low trading volumes and end up not succeeding. The technology you talked about, another thing is to develop a technology, and another thing is for people to accept it, the success of many projects depends on the interest of the people, and to me, I think people are just comfortable with centralized exchange for now.

[BitHodler]

People have been begging for decentralized exchanges ever since MtGox has been hacked, and so far we have only booked a marginal bit of progress. That, if you think about it, is a pathetic milestone if you can call it that.

It just shows how little actual demand there is for these exchanges, because the liquidity problem and the amount of hassle you have to go through in order to get it working just isn't worth it.

I personally don't even need a decentralized exchange. If centralized exchanges start to bother me I'm going to buy and sell locally. I have done some smaller local trades already and it's actually quite an interesting experience the first time.

[Decimation]

Honestly I would rather have my money in a bank, controlled by other people than in a completely automated bank where you are screwed if anything happens. Take a look at Binance for example, if a decentralized exchange got hacked, there would be no hope of getting your money back.

[Haldor]

Centralized exchanges would probably indeed be dominated by non-custodial exchanges in the future, but soon? Not so sure about that. I couldn't count how much non-custodial exchanges or "DEXs (lol)" have been released already, and none has ever beat the ease-of-use and the high liquidity of existing centralized exchanges.

Though this certain exchange claims that they have a "state of the art matching engine", I don't know. I'll believe it when I see it I guess.

Hi mjglqw, you are right. Non-custodial derivatives (futures) exchanges (HEX) does not exist now.... Three exchanges are in the pipeline : Digitex, Leverj and BBOD.
BBOD looks to be the first which open the business for clients. We will see.

Combining advanced blockchain technology with high-speed trading system is not easy, that way the exchanges need more time to launch the product.

I can assure you that there will be no difference between centralized exchange (Bitmex who hold your private keys) and HEX in terms of user friendliness.

You can check how UI looks (as of Feb 12, 2019) : https://www.youtube.com/watch?v=00nqJvwPseQ

[Haldor]

There is no one doubting or arguing that most trade are done over centralized exchange which we all know and accept this, all these famous exchanges you talked about like Binance, Huobi, Polenix, Bitfiniex, Bitmex and many more too didn’t deny that the exchange system they developed is a centralized one, there are so many decentralized exchange that we have an d I mean real decentralized exchanges, but we are the ones that have not really encouraged them

Few are those people that do patronize dex and which is why they have very low trading volumes and end up not succeeding. The technology you talked about, another thing is to develop a technology, and another thing is for people to accept it, the success of many projects depends on the interest of the people, and to me, I think people are just comfortable with centralized exchange for now.

Hi SquallLeonhart,
You made a good point : 'people are just comfortable with centralized exchange (CEX) for now' - until something (hack, regulatory intervention, insolvency) happens !

Are you sure that your exchange has enough funds to withdraw all coins to clients  ?? CEX have no obligation to separate the clients funds from the funds for marketing, salaries so the exchanges may use clients funds how they like.
At HEX, like BBOD, all balances of the clients’ smart contract accounts are visible on the blockchain (e.g. via Etherscan.io website). In comparison, traders’ deposits at centralised exchanges are located in one or several large wallets controlled by the owners of the exchange.

[Haldor]

Honestly I would rather have my money in a bank, controlled by other people than in a completely automated bank where you are screwed if anything happens. Take a look at Binance for example, if a decentralized exchange got hacked, there would be no hope of getting your money back.

You are right, but hacks at DEX are very rare.
You should decide who will safeguard your money, either a owner of the exchange (CEX) or the ethereum blockchain (HEX, DEX)

[rose9696]

That is the risk that we need to accept when trading and investing in a decentralized market. In order to avoid such bad cases, we first need to be aware of protecting our assets.
In the future, there will definitely be new businesses creating insurance for investors. 

[TastyChillySauce00]

Maybe that would be a solution, but people are really persistent when it comes to switching over exchange service to another ones that is a bit more "complicated" in their eyes because it is a new thing and thus low volume.
Plenty of projects there trying so many new models of exchange. Hybrid, decentralized and many more. But, they failed. and you know why? it is the volume and people's participation that is not enough. For many teams there that are trying to solve the centralized exchange problem, keep in mind that without the volume and liquidation the services will be just forgotten.

[Upgrade00]

The reality is most decentralized exchanges are not efficient for instant trading, and day traders contribute largely to daily volume and liquidity of a currency.
If I were to invest and I was not too concerned about how long it would take, I would surely pick a decentralized exchange to purchase through, if it has that currency listed. It offers more security and privacy protection.

[buwaytress]

Preaching to the choir here, I hope.

The CEX to DEX transition was one I had thought would happen quickly, to be honest, as long ago as in 2016. I even invested in a project at that time hoping to build an open source dex that wasn't just about non-custody (which is basically the only decentralised aspect of most DEXs),  and all about atomic swapping cross-chain interoperability etc etc

And we're now in 2019 and I don't think we'll see a true DEX even in 2020 as people seem satisfied with non-custodials. Of course, Bisq and platforms like that also are sufficient to me, but until people prefer to trust peers than unknown companies, this won't come quicker.

[Haldor]

Maybe that would be a solution, but people are really persistent when it comes to switching over exchange service to another ones that is a bit more "complicated" in their eyes because it is a new thing and thus low volume.
Plenty of projects there trying so many new models of exchange. Hybrid, decentralized and many more. But, they failed. and you know why? it is the volume and people's participation that is not enough. For many teams there that are trying to solve the centralized exchange problem, keep in mind that without the volume and liquidation the services will be just forgotten.

Hi Aubert,
Who failed ? probably DEX-es ?? Yes, they are not liquid enough and has bad UX to compete with centralised custodial exchanges (CCEX).
But now a new type of exchanges is emerging centralised, non-custodial (CNEX) :  BBOD, Digitex
They are as fast as the CCEX but they do not hold control the funds of the clients. All the custodial operations are performed by smart contracts. This is the future.

[Ucy]

Non-custodial exchanges are way better than even the best centralized exchanges... decentralized exchange remains the best though. Nothing in Crypto exchange world compares it.
Centralized Non-custodial exchanges could go out of business, restrict certain countries, demand for identities, This fortunately is not so with decentralized exchanges.