This is an opinion piece on crypto exchange by our guest writer Melvin Yung. Enjoy!
With the prolific rise of numerous ICO and their associated tokens, we are seeing more and more cryptographic exchanges bursting onto the scene as well to fill such demand. With such an exponential rise in the number of exchange, it is no surprise we are seeing such volume of cyber attacks, bad press and closures.
Let’s first dive deeper the two exchange structure options as well as common pitfalls and considerations for the exchanges we are seeing today.
In the recent months, we are seeing a prolific rise of a new school of thought on exchange structure. Namely, Centralised vs Decentralised exchanges.
Centralised Exchange has been around since the beginning of human’s first securities exchange as the main platform to market match different parties. In the initial years, for crypto exchange to follow a centralised structure as well was of no surprise. In fact till today most big name exchange are all centralised exchanges.
As we are all too familiar, the biggest problem with centralised exchange is its cyber security. Where small/ new exchanges lack the adequate resources, large exchanges play the game of cat and mouse. All hackers need is just one successful strike whereas exchange need to fend off thousands if not millions of cyber attacks.
Some of the most common attacks exchange face are DDoS, double spending or targetting the exchange’s hot wallet. Some exchanges have added second layer protection, 2FA and internal alert system to help minimize such potential loses.
Personally, I think in future exchange will have to safeguard more against user data breaches especially with all the KYC regulations essentially having exchange collect all the private user information and links to their wallet address.
Decentralised exchanges are exchange markets that do not rely on any third party/ escrow services to hold customer’s funds. Also an exchange cannot and should not claim that they are decentralised if they have the security switch to freeze users tokens. If decentralised exchange are able to achieve that, on the security front, they will indeed be safer as these exchanges would not have any money for hackers to steal from.
One major drawback of decentralised exchange right now however is the speed and limiting capacity of the exchange in their order matching system.They are mostly still slower and untested in high volume situations. However with progressive improvements, this may be the future for value exchange.
Apart from centralised or decentralised exchange, for a normal user one should not forget to include some of the hidden fees that should be factored into their crypto-asset portfolio. Not only are there trading fees, withdrawal fees and your local fiat acceptance are issues for consideration as well. Alot of non-USD & Euro denominated countries are facing high transactional friction simply getting crypto-assets let alone converting back to fiat in future.
Another common issues users face include exchange slippage. Exchange slippage is the gap in value for purchase through said exchange vs another more global exchange. Eg: buying BTC from localbitcoin as opposed to binance. This is most common in smaller, localised exchange due to the lack of liquidity or high government regulation thereby higher cost.
Most exchange will continue to exist to cater to the different local markets and ICO niches. More will continue to face the test of security breaches as we see a great shift towards a decentralised exchange technology.
Users should simply remain vigilant and avoid exchange with negative track record. If you are a buy and hold investor, transferring out crypto-assets to your personal wallet can help to reduce your exchange hacking risk.