Here’s why decentralised exchanges are growing in popularity

Decentralization forms the basis of every Blockchain-based digital asset, especially cryptocurrency. It is expected to be the major driving force in the development of the digital economy. However, the irony lies in the fact that these decentralized assets are traded on a centralized platform.

Centralized exchanges were the first cryptocurrency exchanges to emerge, facilitating trade under the control of a central authority. These exchanges, for example, Binance, provide convenient platforms to trade in a regulated space. It offers a trading option to users, where a third party monitors trade, checks the order books and ensures that they are compliant with the regulations.

Centralized exchanges are still in demand due to a number of reasons. Even today centralized exchanges top the charts in terms of trade volume. This is because these exchanges offer high liquidity that enables the top centralized trading platforms to conduct high quantity trade. They offer their users the wide and familiar ready-made functionality that has been honed from several years of experience.

The exchanges own extensive development resources which are usually supported from the high daily earnings and initial funding. These resources provide adequate capital to update and develop their trading platform to adapt to user needs. This helps the exchange develop customer-friendly platforms, making trade easier.

The centralized exchanges have adapted to government regulations, in view of the recent regulatory upgrades. They have updated their terms on the basis of the regulation policy or implemented KYC (Know Your Customer) and AML (Anti-Money Laundering) requirements. However, being regulatory compliant can be a disadvantage as well. In order to confirm identities, users need to submit their identification data to the central authority.

Nevertheless, they suffer from a huge disadvantage, which is also their most fundamental nature — centralization. The user data including those of identity and assets are stored in the exchange’s centralized database, which makes it open to the threat of illegal access or data theft. Trading in centralized exchanges presents many other issues as well, which are discussed in the upcoming sections.

The Shortfalls of Centralized exchanges

High Cost of Transactions

The centralized exchanges are often criticized for charging a high listing fee. The charges in centralized exchanges are inherently higher owing to different factors such as profit, the need for larger staffing, overhead and security requirements. The incurred costs are passed on to the consumers as higher transaction fees, making trading a costly affair The high transaction fees can be addressed with trade mining. In trade mining, the exchanges utilise a native exchange token for fees. The users are reimbursed through the method of proportional distribution, by collecting the profits through the appreciation of token value via an increased demand.

Security and hacking vulnerability

The centralized exchanges store all their consumer assets and other details in a centralized database making all of them prone to hacking. This has been depicted by the different hacking incidents of digital asset exchanges such as Mt. Gox and Coin Check.

The flaws plaguing the security system of these exchanges hinder adoption. Present-day investors must have a particular tolerance and appetite for risk, in addition to the acute ability required to differentiate the legitimate investments from the exit scams and phishing attacks.

Unfortunately, the crypto-sphere has been plagued with hacks, scams and security flaws over the past decade. A few high profile incidents have taken place in 2018 as well:

· Coinrail Hack — About $40 million were stolen from a boutique exchange in South Korea.

· Binance Hack — $45 million stolen from one of the largest global exchanges

· Zaif Hack — $60 million hacked from Zaif, a Japanese exchange

· BitGrail Hack — $195 million stolen from the Italian exchange which was also the first to list Nano

· Coincheck hack — $500 million worth of NEM stolen from the second-largest exchange in Japan.

Centralized wallets as major honeypots

One of the biggest risks of centralized exchanges lies in the custody of funds. When the money flow from new investors increases, the centralized exchanges become increasingly like honeypots, creating an enticing target for malicious attack.

The character of a centralized exchange mirrors that of a trusted third party who is in charge of storing the users crypto assets to create a pool of liquidity. This is being done by aggregating funds into digital wallets owned by the exchange.

The rise in market growth is expected to increase the severity and frequency of attacks as is evident from the recent user hacks, where the money and private data were stolen.

Withdrawal Limits

Centralized exchanges are usually known to impose a limit on the withdrawals. This is done as a security measure to create a limit for the money that can be withdrawn together at a time. Apart from putting the trader at an inconvenience, the withdrawal limit also creates a misalignment of incentives. The exchanges stand to benefit by maximizing trading fees on the locked-up funds.

Order Arbitrage

One of the most significant issues with centralized exchanges is that they are able to view both the incoming and outgoing orders. This offers them the opportunity to make quick gains through the practice of front-running. The exchanges can also delay crediting orders in order to capitalize on the price spreads during the price movements.

Volume and Transaction Scaling

A surge in trade volume across trading platforms will lead to technical difficulties and delay, even in large cryptocurrency exchanges. This is due to the inability of the exchange server to cope up with the massive influx of activity.

Major exchanges such as Bithumb recently experienced downtime of about 90 minutes, which led to the lost trade value of about 60000 Bitcoin. This is just one of the many different problems experienced by centralized exchanges due to its inability to deal with the bulk volume of trade that occurs on certain days.

The BankDex Solution

With the maturation of the cryptocurrency ecosystem, the inherent issues of centralized exchanges become visible on an almost daily basis. This brings to the fore the need for decentralized exchanges that facilitate smooth trade.

BankDex decentralized cryptocurrency exchange is built to overcome all the issues pertaining to cryptocurrency trade today. BankDex addresses the issue of costly trading by offering the facility to trade free of cost for the initial 90 days. The exchange services are thereafter available at a nominal fee. They also offer unlimited withdrawals, unlike the centralized exchanges.

Although decentralized exchanges solve the security issues of centralized exchanges to a great extent, they are not completely secure. BankDex is designed to provide foolproof security with the help of a highly secure BankDex wallet by storing the private keys off the blockchain.

The BankDex Smart Contract ensures a trust-less authentication and authorization of transactions without the involvement of a third party. This helps in eliminating the issues of front-running and facilitating smooth trade.

In a nutshell, BankDex ensures easy, flawless and secure multicurrency trade by blending the best of decentralized technology.