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What is the cryptoexchange and how does it work?

The creation of cryptoexchanges has been a logical consequence of the emergence of cryptocurrencies like Bitcoin. While there are almost 200 of them today, the majority of these platforms do not ensure complete security. 

Source: Pixabay
Source: Pixabay

When bitcoin emerged only a handful of specialists could imagine that this digital asset will create a basis for a new kind of “cryptoeconomy.” With time – as bitcoin grew in value attracting more and more investors and alternative cryptocurrencies and tokens came into being – it became clear that the creation of specialized cryptoexchanges is only a question of time. Like in a traditional financial system, cryptocurrencies needed an instrument for exchanging, purchasing and trading digital assets.

It didn’t take a long time to meet this demand: Today one can count around 200 cryptocurrency exchanges. Yet it would be too early to say that the market has been formed. Every exchange has its pros and cons, so many players use a number of platforms to carry out deals.

The demand is still high because of the trust factor as well: The majority of current exchanges are vulnerable to hacking. So it’s vital for the future of this segment to create an exchange that will ensure greater security of its users and their assets.

To begin with, what is a cryptoexchange? To put it simply, it’s a platform that allows exchanging crypto assets. One can compare it to the traditional exchange for professional traders but instead of fiat money cryptoexchange uses digital currencies.

There are three types of cryptoexchanges: centralized, hybrid and decentralized.

Centralized exchanges are most common. They have access to all information and assets of a client but cannot guarantee a 100% security. This vulnerability to potential hacking can cost its clients all their assets and practically lead to the closure of the platform itself. This is the main problem of centralized exchanges right now.

Hybrid exchanges were created to address this security issue. They carry out all the transactions, but don’t control the assets. This partly helps to fix the problem, but they still can’t operate without certain centralization.

Finally, decentralized exchanges allow to carry out transactions by using a distributed technology and without a participation of a third side. While such platforms are only being developed right now, it is them that will ensure the further development of a cryptocurrency financial system. A decentralized exchange will be able to guarantee the security of users’ assets thanks to blockchain technology. The latter will help to minimize the risk of hacking or bankruptcy, as well as of potential external regulation. Our project called xChainge is one of the attempts to implement this idea.

The level of decentralization in an exchange depends on what functions are decentralized and to what extent. Every exchange has three main functions: storage of assets and valuables, clearing (calculation and assessment of trade orders) and transfers between counterparties.

The current hybrid exchanges have moved the majority of operations on distributed platforms, but they cannot carry out a distributed clearing of deals. xChainge decentralized platform is the first platform that will fix this problem. It will allow doing fast exchanges of any digital assets without a necessity to provide access to one’s money to a third party. At the same time, assets storage, clearing and calculations of transactions will be distributed. This will allow an exchange to ensure anonymity of its clients and security of their assets. 

This is a YourStory community post, written by one of our readers.The images and content in this post belong to their respective owners. If you feel that any content posted here is a violation of your copyright, please write to us at mystory@yourstory.com and we will take it down. There has been no commercial exchange by YourStory for the publication of this article.
Daniil Popov is the co-founder of the xChainge project (https://xchainge.io/).

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