Are centralised exchanges good or bad for cryptocurrency?

Cryptocurrency is all about decentralisation, yet we centralise storage and exchange of cryptocurrency on centralised exchanges. Many would argue that this is not fulfilling the vision of cryptocurrency and blockchain, and a better alternative is decentralised exchanges or DEXs such as Bitshares.

Why are centralised exchanges a problem for cryptocurrency?

On the face of it, the world is running on centralised intermediaries to serve and sell services that the market desires. This spans from banks providing financial services, to Uber providing transportation services to lawyers providing legal services.

However, the blockchain has the potential of changing this, to decentralise services that oftentimes ended up in duopolies and in the hands of a few powerful intermediaries. It is therefore a direct attack on the potential of blockchain, if it fails to decentralise the currencies built on top of this technology.

Let alone that centralised exchanges by definition have a central point of failure. If hacked, users risk losing all their belongings.

MF Global, Mt. Gox and BitStamp proved to the world what harm exchanges can cause to the cryptocurrency community, and the outcry that follows. The hack on Mt Gox, despite having nothing to do with the security of the traded cryptocurrencies or underlying blockchains, set back the ecosystem immensely, halting progress in blockchain innovation and putting the technology in a shameful spotlight to the public. Ever since, people have been sceptical not only about cryptocurrency, but exchanging cryptocurrency for professional or personal use.

This is a problem, because without broad acceptance that cryptocurrency is something that can be stored and exchanged safely, mass adoption will never occur and the potential for cryptocurrency to be a serious alternative to a debt-based fiat system would be eroded.

To take a quote from Bitshares’ own website:

“There is no reason why the same entity needs to be responsible for issuing IOUs [I Owe You] and for processing the order book. It is only because these two roles are combined that we have a tendency toward centralization in the Bitcoin exchange space. If we want to create a decentralized exchange then the first step is to move the order book on to the blockchain where everyone can see it.”

Why haven’t decentralised exchanges gained more popularity?

Decentralised exchanges have not yet become mainstream, but as cryptocurrency gains more popularity and centralised exchanges are increasingly becoming targets of cyber attacks and government regulations decentralised exchanges are forecasted to increase significantly. As of now, 99% of transactions occur on centralised exchanges. This proves great for hackers and troublesome for crypto investors. Below we address additional obstacles limiting the mass adoption of decentralised exchanges.

We as users have become accustomed to choosing convenience and in return give up things like privacy and freedom. In addition, we have also become extremely accustomed to support systems for every problem we encounter, big or small. Consider for a second, how many times in the last month you’ve used a service and contacted a customer service representative. Either over the phone or online to resolve an issue that you have encountered. Whether you were making a complaint or made a mistake on your shipping address, all of these issues are quickly resolved with the help of assistance. However, on decentralised exchanges there is no central authority and therefore, no individual(s) or entity on the other side can help you gain access to your account if you misplace your account information or if it is stolen. On the upside, decentralised exchanges do not have access to your account or account information. Therefore, there is no risk of internal misconduct within the organisation that holds your funds. Although decentralised exchanges do not have direct access to your account and account information many of them, including Blockbaisis, have chatbots to answer any questions you may have along with support pages that anticipate questions users might have.  

Centralised exchanges such as Coinbase have gained popularity due to their easy to navigate platform. This accessibility allows users across all ages and backgrounds to to use the platform, regardless of technological expertise. Centralised platforms focus primarily on user-experience, while decentralised networks are built around security. That’s why decentralised platforms such as Blockbasis are combining the user interface design of centralised platforms and the security of a decentralised platform. Allowing users the benefit of a safe and secure platform, that is easy to use.

Society in general and communities in particular are slow to adjust. Remember the days when only a few of your family/friends had Facebook, a smartphone, etc. These individuals are known by nicknames such as tech geeks, early adopters and innovators. What is known as the tipping point is the time period in which society begins to embrace and accept the new product/service/technology. The tipping point is located in between the early adopters and the early majority. The early majority makes up 34%, the late majority makes up 34%, and those last to adapt, also known as laggards, make up a 16%. This bell curve (see below) can be applied to products and services across all industries and categories. What is important to note is that the majority of society accepts the new technology in the latter half. Waiting on the sidelines until they are confident that the product or service truly offers everything it has advertised. So, as seen from the chart below, the mass adoption of a new technology takes time. Thus, the slow adoption of decentralised exchanges a primary method of exchange.

https://upload.wikimedia.org/wikipedia/en/4/45/DiffusionOfInnovation.png

For now, centralised exchanges are clearly dominating, but this trend will be short lived as the journey through the innovation adoption cycle continues. Time will tell how fast the adoption cycle will take, but one thing is clear, cryptocurrency users and traders are moving more and more of their trades to decentralised exchanges.

Is the high risk worth the minimal benefits?

While centralised exchanges may suffice for now, the risk is undeniable. As more and more countries are enacting regulations and bans of cryptocurrencies and exchanges on a daily basis the only way to prevent your cryptocurrencies disappearing into thin air is by using decentralized exchanges in which you can ensure your currency will always remain yours. Not only are regulations and bans a great risk of centralised exchanges, but they are also heavily targeted by hackers as seen from the hacks on MF Global, Mt. Gox and BitStamp.

In the end, cryptocurrency is about decentralisation. Placing centralised exchanges in between users somewhat defeats the purpose of cryptocurrency and the underlying blockchain technology. Blockbasis offers a solution by combining user interface design on a decentralised network. Ultimately, Blockbasis is aiming to do what Apple did for the computer industry; making a technologically advanced product available to the masses through simplification and ultimately fulfilling Satoshi Nakamoto’s vision of a truly decentralised network.

 

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