Though still in its early stages, experts across industries believe that blockchain technology has game-changing benefits and is sure to emerge as the “next big” thing.
Decentralized networks, immutable transactions, super-fast transactions, immense security – are some of the top advantages of blockchain technology. With that said, Mohsin Jameel believe that the cryptocurrency exchanges of today do not utilize the massive potentials of this technology.
A major reason – the cryptocurrency exchanges of today are fraught with flaws and drawbacks. Here are some of the problems of existing cryptocurrency exchanges.
The Problems with Current Cryptocurrency Exchanges
The majority of crypto exchanges today are centralized exchanges. Can you see the irony of this situation? For a currency that prides itself on its decentralized nature, to be available on an exchange that is centralized is not the best solution. These centralized exchanges don’t address the very problems that blockchain technology intends to solve.
When a crypto-exchange is centralized – problems like corruption, unfair practices, unfair distribution of power and control – come into the picture.
This is one of the main reasons why – most crypto-exchanges today have been involved in public scandals like – hacker attack, poor handling of funds, insider trading, market manipulations, Denial of Service (DoS) attacks, shutting down of the network without proper notice to users, unreliable customer service, flash crashes, website malfunctions when the price of currencies hit a high – and more.
The worst case scenario – the companies who run these crypto-exchanges have access to the private keys of their users. Meaning, they are, the actual owners of the currencies stored on their platform, since they can access it any time. What more, they could very well take away all your funds and disappear. If such a situation were to happen, then there is no way for you to recover your funds back.
I would like to remind you of the Mt. Gox hack, considered one of the biggest heists in Bitcoin history till now. At the start of the year 2014, Mt.Gox was that biggest Bitcoin exchange platform in the world, and it regularly handled 70% of all Bitcoin transactions made worldwide. Sadly, the very next month, the tables were turned.
The Japanese crypto-exchange platform was the victim of a massive online hack and ended up losing a whopping sum of 740,000 bitcoins. This amounted to nearly 6% of all existing Bitcoins. Apart from the bitcoins, the company also lost $27 million that was stored in its bank account. Though the company managed to recover around 200,000 bitcoins, the rest was never heard of again.
As you can see, crypto-exchanges are highly vulnerable. Despite the promises of security and efficiency, storing your digital currencies in centralized crypto-exchanges is not all that safe.
De-Centralized Crypto-Exchanges into the Picture
This is where decentralized crypto-exchanges come into the picture. As the name implies, these digital currency exchange platforms are decentralized in nature and abide by the rules of blockchain technology.
Transparent, irreversible, immutable, no single point of failure, controlled by users, super-fast transactions, affordable costs – decentralized exchanges make use of the potentials of blockchain technology.
The Problems with Existing Decentralized Crypto-Exchanges
With that said, not many digital currency users are comfortable in using a decentralized exchange or DEX in short. They believe that decentralized exchanges are difficult to use and don’t cater to the needs of beginner traders. They argue that since a particular company doesn't run decentralized exchanges, customer service often takes a backseat and getting the right help becomes difficult. These are the woes of the beginner trader.
On the other hand, advanced traders too don’t prefer the decentralized exchanges of today. They aren’t satisfied with the transaction speed and other basic functionalities offered by the DEX.
Additionally, the current decentralized exchanges of today are confined to their native blockchains. And, when it comes to decentralized exchanges that offer cross-blockchain transactions, you cannot directly transfer from one digital currency to another.
Instead, the DEX provides you with a smart token (similar to an IOU), which you can exchange for your preferred currency. This smart token is vulnerable to manipulation and takes control of your digital tokens away from your hands.
The Crypto Exchanges of the Future
As you can see, the crypto-exchanges of today – both centralized and decentralized – are far from perfect. This has led several organizations and firms to build second-generation de-centralized crypto-exchanges.
These are built on top of scalable blockchains, thereby overcoming the problems of today. Modern DEXs reside completely within a blockchain. They can seamlessly trade with other blockchains and require just an open source user interface to trade digital assets from one blockchain to another.
These cross-border transactions are made possible via Atomic Swaps. These are snippets of code that allow blockchain-to-blockchain transactions without the need for any intermediaries. So, far inter-blockchain transactions were carried out only by a central team as in the case of centralized exchanges or using smart tokens in decentralized exchanges.
With Atomic Swaps, you eliminate the need for both a central monitoring team as well as smart tokens. The Lightning Network is one such example which allows for swaps between Ethereum and Bitcoin without using an intermediary.
The decentralized crypto-exchanges of the future will allow users to retain complete control over their digital assets, and perform peer to peer transactions, without routing through a central authority.
Final Thoughts by Mohsin Jameel - The Future lies with Decentralized Exchanges
Mohsin Jameel says 2018 saw the fall of several crypto-exchanges across the world. It’s clear that digital currency users are moving away from centralized crypto-exchanges. Decentralized exchanges don’t just offer a plethora of benefits just for crypto-users but offer immense potentials for the entire movement as well.
Get ready to see an increase in the number of decentralized exchanges with plenty of features in 2019.
Want to make your startup journey smooth? YS Education brings a comprehensive Funding and Startup Course. Learn from India's top investors and entrepreneurs. Click here to know more.