Early cryptocurrency exchanges sought ways to emulate the traditional exchanges, perhaps as a means to bring familiarity to a budding and mysterious asset class. However, this has often stifled innovation despite the virtually unlimited potential offered by the cryptocurrencies’ underlying technology.
More recently what is emerging is a new generation of exchanges offering tools to transact new world assets.Developments like CME and CBOE, that list futures contracts on Bitcoin, and traditional asset managers working to bring Bitcoin ETFs to investors (most recently Van Eck) don’t show any signs of slowing down, but they are still trying to shape the future of digital assets through a decades-old lens. This is all about to change.Centralized Versus DecentralizedPrior to the past decade, all exchanges were mostly centralized and largely operated out of one physical location.
Today, trading floors are waning, replaced by technology that prioritizes speed and streamlines the user experience. Examples include the Shanghai Futures Exchange, CME Group, and the New York Stock Exchange.
These venues have centralized servers and route all orders through one point of entry to the central limit order book.Coinbase, Binance, and Kraken have adopted a similar model when looking to create an exchange for cryptocurrencies, likely because they wanted people to feel comfortable trading these assets. These centralized exchanges (CEX), now all electronic with servers located in a central location, allow for global trading provided that one passes the registration process and KYC/AML checks.When considering trading on a CEX, it is important to remember that your coins are held (custodied) by the exchange; your private keys are not in your possession because all transactions are recorded on the central order book located on their servers.
If the exchange is hacked (like what happened with Coincheck), shutdown by a government entity, or if it just goes offline, you could potentially lose all your coins. The only time the blockchain is involved is when you withdraw these coins from the exchange and resume physical ownership.Given these pain points, many traders are beginning to look towards decentralized exchanges (DEX) including IDEX and CryptoBridge. Read more from hackernoon.com…
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