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Centralized or Decentralized Exchange? Which One to Choose in 2019

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Centralized vs Decentralized Exchanges

A trader’s worst fear is having their favorite exchange hacked. It is even a messier situation if the said trader has some crypto coins lying around in their wallet hosted on the exchange.

Hundreds of thousands of investors, if not millions, have had their cryptocurrency portfolio at risk at some point or another. In the past decade, there have been dozens of exchanges whose accounts were compromised and funds siphoned off. All victims had one thing in common – the exchanges were centralized.

Decentralized exchanges are not prone to most of these risks.

What are Decentralized Exchanges?

Decentralized exchanges (DEXs) are crypto trading platforms which do not have a central authority. The exchange’s core business goes on without active involvement of the management. The team behind a decentralized exchange deals with tasks like administration, development, and maintenance. The actual trading is run by smart contracts, which are independent and do not need human intervention.

These exchanges use a peer-to-peer mode of connectivity.

Benefits of Decentralized Exchanges

Decentralized exchanges have become popular among blockchain fans.  It uses a peer-peer crypto trading method. This reduces the risk of theft from hackers, a problem which has been plaguing centralized exchanges.

Secondly, decentralized exchanges do not have to operate in a specific country. Instead, they work autonomously, without having to obtain licensing from different regulatory bodies. For this reason, they guarantee anonymity because the traditional KYC (Know-Your-Customer) rules are not a requirement by default.

Decentralized exchanges do not monitor peoples’ sizes of transactions. Unlike Coinbase and Binance, there are no limits for funds that can be staked and exchanged. This is possible because there are no Anti-Money-Laundering requirements for these institutions. This gives freedom to customers to trade without having to worry about the amount of money they stake.

Custodial Vs. Non-Custodial Trading on Exchanges

Most crypto traders use exchanges to make their ‘buy’ or ‘sell’ bids. In some platforms, traders’ funds lay under the custody of the company. Other exchanges do not take custody of any funds.

Custodial Vs. Non-Custodial Trading | Centralized vs Decentralized Exchanges

Importance of Non-Custodial Exchanges

When an exchange has custody over a trader’s funds, it handles the coins’ private keys. Non-custodial exchanges hand over the private keys to the owner. For example, Shapeshift is a non-custodial exchange.

Non-custodial exchanges have clear security advantages over their custodial ones. It removes attack vectors, such as the 51% main chain attack. Some non-custodial exchanges also have better security features which prevent instances of coin loss through fraud.

These days, the exchanges have become more user-friendly. They are intuitive to use and less prone to errors.

Popularity of DEXs

For now, many traders, investors, and other market players have little exposure to DEX. In terms of popularity, DEX still has some ground to cover. Centralized exchanges like Binance and Coinbase still control 99% of trades.

The most significant number of people joined the market in 2017. In that time, decentralized exchanges were still in their early stages. However, tables are about to turn because there has been an increasingly high number of DEX talks on Google forums, Twitter, Quora, and Reddit.

Watchdogs: Can regulators Seize a Decentralized Exchange?

DEXs do not need to comply with KYC and AML (Anti-Money Laundering) rules. Anyone who owns a wallet can take part in trading. Moreover, DEXs allow users to trade worldwide because the process does not involve any fiat currency.

How Easy is it to Hack Decentralized Exchanges?

Virtual transactions are prone to hacking. DEXs are not entirely safe either. The reason for this is that the exchange takes place between two anonymous parties. They make use of a smart contract to do this. Due to this, hackers may manage to compromise either of the two customers. However, in DEXs, Hackers have a hard time because the exchanges are unpredictable and the rewards usually are not worth it.

However, it is not all roses and unicorns.

According to Kirill Shilov,

We are assuming that the code of the DEX has no bugs. That’s why a DEX can be considered safe only after a number of audits, intensive testing, and proven years of being functional and serving its users.

Centralized Exchanges and the Odyssey of Hackings

Recent hacks on centralized exchanges have brought people’s attention to DEXs. QuadrigaCX exchange, a centralized exchange is the most recent victim; A password loss that led to a loss of $190 million of subscribers’ money.

Odyssey of Hackings | CEX vs. DEX

It was the latest in a string of hacks that have lost investors a cumulative, eye-watering $1 billion since the crypto frenzy took off. More than 30 crypto exchanges have been compromised in the past decade. Here are the most prominent:

  • The Coincheck NEM (XEM) heist – Hackers made off with a half a billion dollars in a daring heist. This took the record as the biggest and most devastating theft in world history. Coincheck admitted to using shoddy security practices, including storing coins in hot wallets.
  • Gox exchange – Hackers made off with more than $460 million after hacking the exchange in 2014. Since the market was relatively smaller at the time, the impact of the hack was greatest here.
  • Bitgrail – In February 2018, a Nano wallet with $195 million was compromised, and funds were siphoned off. The attack was apparently an inside job. According to the exchange’s CEO, Nano developers were to blame for the breach. The developers, in their part, accused the exchange of putting a weak security system in place and hence giving space to hackers to undertake an exploit.

Following the QuadrigaCX saga, Nick Szabo’s narrative of ‘Trusted Third Parties are Security Holes has led people to have second thoughts. Also, it has shown that the level of trust needed when getting involved with centralized exchanges should be very high.

This has given DEXs a plus considering its decentralization which makes it relatively hard to hack and thus increasing their adoption.

The Nash Decentralized Exchange for Cross Trading – A Unique Twist to the Narrative

Up to now, ‘traditional’ DEXs have been dealing with crypto. Users need to convert their fiat money to bitcoin or the major altcoins before they can trade in a DEX.

Nash promises to change that. You can now fund your DEX account using fiat currencies. The best way of doing so would be using a bank wire transfer. After loading the account with cash, there is a beautiful dashboard which gives you a breakdown of your funds.

When you start trading, the dashboard tracks your trade history, helping you make informed decisions in future trades. It also enables you to monitor the performance of different assets. When you see Bitcoin starting to taper off, for example, you can make a ‘sell’ order promptly, hence making clean profits.

Save the date! Nash is now wrapping up everything for the beta-release on this Sunday, March 31st, 2019. Get ready for state-of-the-art security, superfast trades, and intuitive, personalized charts.

Nash Enables to Trade Across Different Chains

Nash gives users the power to trade across different chains. Every coin has its own blockchain. Bitcoin’s chain is different from Ethereum’s, Litecoin’s and all the altcoins’ chains. With Nash, you can trade coins from Bitcoin’s chain to Ethereum’s. At the time of going to press, there were virtually no major DEXs which could allow you to do this.

Nash was founded in 2017. It was initially called the Neon Exchange because it was built on the NEO blockchain. Hundreds of thousands of people already use the platform, every day.

The team behind Nash is as vibrant and multicultural as teams come. It contains leaders in the cryptocurrency industry, multiple PhDs, professionals, alumni from the startup incubator Y Combinator, and designers from all walks of life.

Fabio Canesin, the co-founder of Nash, explained by stating,

You have a setup where the possession of the digital asset is held by smart contracts on the blockchain and the ownership is still retained by the original owner.

He continued by saying that the Nash Protocol uses the explained principle to ease noncustodial trading. Nash, unlike conventional ERC20-based DEX, was developed to facilitate the cross-chain trading of several assets which would circumscribe tokens operating on networks like BTC, ETH, NEO, LSK, and WAVES.

As per the company, its platform will bring together an off-chain matching engine and on chain smart contracts to oversee smooth assets transfer between user wallets. Best of all, it complies with all the legal requirements required for an institution of its caliber.

The Nash Provable Fair Matching Engine

Nash has a multi-chain channel manager. Channels are accounts that are not on the blockchain, which allow users to handle transactions off-chain. Transactions initiated by users may go through. Once some time passes, the channels reconcile transactions on the blockchain.

provable off chain matching engine | CEX vs DEX

 

Ethereum’s Raiden’s network uses similar channels. Nash takes the concept a notch higher. The Nash Channels span different blockchains. It enables users to send money to smart contracts which update the blockchain. The smart contracts help expedite the transactions.

The matching engine is provably fair. This means users can prove that trades are matched in a fair way. The matching engine ensures that no price manipulation takes place in the background.

Why DEXs are the Way to Go

Generally, DEXs are safer than Centralized Exchanges because

  • centralized exchanges can easily be hacked resulting in customers losing funds.
  • there is a risk of disappearances of exchanges, leaving users with no one to turn to.
  • in case of suspicion of abetting crime, centralized exchanges can easily be seized by authorities locking user’s funds for years.

DEXs have come out strong for the simple reason that no third parties get involved during transactions. There is direct updating of trading transactions on crypto Nodes with no database entries, and there are no private keys in the application.

The Bottom Line

At the end of the day, it all boils down to trust. In centralized exchanges, you have to trust systems run by third parties, which can be accessed by people. In decentralized exchanges, you have to believe tamper-proof third parties. They are not prone to human error or malice but run by a seamless smart contract. Which one would you go for?

Do you think DEX will surpass centralized exchanges in terms of cryptocurrency transaction volume in the few coming years?

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