A lot of blockchain projects that came to life during the 2017 mania either feel like an exit scam in the making, a whitepaper idea that will never come to fruition, or, at best — a gimmick, a solution for the non-problem. These gimmicky projects are similar to each other in one thing — they slap a blockchain tag on any industry inconvenience and call themselves “great disruptors” or “the next big thing in the game”. I am not going to call out exact projects, but I reckon you have two or three names popping out in your head. The kind of projects that made you think “why does this stuff need a blockchain in the first place?”.

These projects do a disservice to the ecosystem not only because they take money from the gullible investors only to list 6 months later on a c-tier exchange and instantly dump to 0.1x of the ICO price, but also because the sheer mass of these gimmicky projects buries actual gems. We are growing so accustomed to projects from late 2017 running out of money, stopping the development or just simply exit scamming that we usually disregard the project if we see that it started its life around the time of the mania. Whereas in 95% of cases this instant disregard saves us time and potentially money, 5% of the time we lose out on learning about a project that is actually innovative and exciting.

One of the new developments that people are quick to claim as gimmicky is the hybrid model of exchanges. A lot of times I was instantly dismissed in conversations with people from beginner to upper intermediate knowledge of blockchain when I started to explain the potential of hybrid exchanges. And it’s a great shame, really, since I think that in the future there will be only two kinds of exchanges in crypto — derivative exchanges (for futures, options, forwards, etc.), such as BitMEX or Bakkt and hybrid exchanges. So instead of arguing with each person individually about the potential of hybrid exchanges, I decided to write this article and possibly try to persuade more people at once than I could do with a conversation.

So, what are hybrid exchanges? Hybrid exchanges are the exchanges that combine in themselves the features of decentralized and centralized exchanges, hence the “hybrid” nametag. The downsides of both centralized and decentralized exchanges are pretty well-known. Centralized exchanges are never 100% trusted, especially in the world of digital assets, where a lot of people are privacy freaks to different extents (not your keys — not your crypto, and all that jazz), and CEXes are prone to security breaches. Even behemoths like Binance have been successfully breached several times in the last two years. Decentralized exchanges, although better for security purposes, aren’t all that great either, as most of them take a really long time to process orders and generally feel like you are using some software from year 2007 at best. However, both of CEX and DEX problems can be alleviated to a great extent by combining their architectures and taking the best features out of each. Hybrid exchanges, you time to shine!

How does that work though? The solution is actually pretty simple, but very elegant. Hybrid exchanges use the digital wallet architecture similar to the one that is used by purely decentralized exchanges. It means that you hold your private keys for your wallet, not your exchange. Obviously, this is a double-edged sword — with great power comes great responsibility, as now users are obliged to take a great care of their accounts and personal keys, as a support email won’t magically unlock your account if you will manage to lose access to it. But what are you doing in crypto anyway, if you are not able to secure your private keys?

With regards to trading side of things, hybrid exchanges are closer to centralized exchanges, as they usually rout their orders through centralized servers. However, this is not always the case, as there are some hybrid exchanges that use blockchain to confirm every order, but more about that later. Having trading process closer to the centralized model alleviates one significant problem of decentralized exchanges — slow and non intuitive user experience. This might be crucial for a large amount of users, as they care about decentralization only as long as it works well, and, from what I see, people can give away some decentralization benefits to have a much better and faster user experience, which is exactly the goal that hybrid exchanges try to achieve.

To go from theory to practice, let’s take a look at one hybrid exchange that is still in development but is going to be released soon — NEXT.exchange. I am not going to cover all of the features of their exchange, as promotional materials released by the exchange itself would do a much better job of highlighting them, but I am going to show some obvious benefits of hybrid approach using them as an example. So, let’s get to it.

First of all, I am going to discuss the features that NEXT shares with decentralized exchanges. For starters, it is community-run, as it has a large network of masternodes that fulfill different purposes — they confirm orders on their custom blockchain, participate in voting and governance of the network and get fees from exchange operations. This feature is pretty impressive, as I think that is how exchanges should be run in the future, with profits divided between “shareholders” that have a stake in the network and support its technological development and strength. This is a great usage of blockchain technology and a great way to democratize the whole digital asset exchange landscape. Beyond that, NEXT.exchange is routing all of their transactions through their blockchain and allow users to create wallets with personal key exporting on the horizon, so the crypto in these wallets truly belongs to the users.

From centralized exchanges, NEXT takes the UX, efficiency and governance. That means that they try to create a user interface that is much more similar to the interface that we can see on CEXes and not on DEXes. This is a huge improvement from the current norm of decentralized exchanges, as was mentioned before. Moving on, by efficiency and governance I mean the fact that some decisions are still made by a “centralized” team such as coin listings. The team promises to do their due diligence and not list coins that are scams or toxic to the ecosystem. Even though it goes a bit contrary to the libertarian logic of decentralized exchanges, it safeguards users from buying into potential exit scams, which was very commonplace on exchanges like IDEX.

To sum it all up, I feel like hybrid exchanges is a great innovation in crypto space that should be explored further. Decentralized exchanges were a huge boost forward in terms of innovation, but with time, it became clear that users just don’t want to deal with slow order processing and clunky interface. However, some people also don’t want to give away the security advantages, and this is the part of the market that hybrid exchanges may capture in the future.

I hope that I, at the very least, made you think a bit about hybrid exchanges and why they are far from a gimmick. Have a great day and good luck navigating the crypto landscape!