The convenience of centralised exchanges makes them the go-to platform for cryptocurrency trading. While they may account for the majority of transactions taking place, their counterpart, decentralised exchanges, support the core values at the heart of the cryptosphere. Which is better? Continue reading for the advantages and disadvantages of both.
HOW DO EXCHANGES OPERATE?
One is controlled by a company or third party; the other connects two traders who want to buy or sell corresponding amounts of cryptocurrency. Despite their differences, the former (centralised exchanges), have become the dominant platform in cryptocurrency trading.
On a centralised exchange, you are faced with two choices. You can either find an offer that matches your requirements, or submit your own buy order. The exchange acts as a middleman, taking tokens from both parties before reissuing based on the terms of the agreement. All they ask for in return is a fee for facilitating the transaction.
On the other end of the spectrum, you have decentralised exchanges. They operate in much the same way as a decentralised ledger. There is no controlling party or regulatory body—just an algorithm that connects two users who request to trade. Once connected, it is down to both parties to agree on the terms before transferring funds between one another. There is no intermediary, no fees, and greater anonymity.
CENTRALISED VS. DECENTRALISED EXCHANGES
It seems strange that technology built on the idea of being devoid of central control would choose to trade on a centralised platform. However, there are several advantages and disadvantages to both types of platform. Let’s start by looking at the more popular option—centralised exchanges.
CENTRALISED EXCHANGES
Popular exchanges include:
• Binance
• KuCoin
• Bitfinex
• Bittrex
• Changelly
ADVANTAGES
The first immediate advantage is the user base of centralised exchanges. When you are relying on other parties to do business, having a large pool of potential clients is ideal. Without the volume of transactions taking place on centralised exchanges, users would not be able to make timely use of fluctuating cryptocurrency values. Centralised exchanges are also ideal for beginners or the inexperienced. Rather than having to trade token X for token Y, crypto newbies can use fiat currencies to purchase crypto tokens.
They also tend to be more user-friendly, in part to encourage the previous benefit. For experienced traders, centralised exchanges offer a suite of tools that allow high-volume trading, margin trading, and the ability to extrapolate large amounts of financial data. There is also a central authority if things go wrong, although this isn’t always fully regulated.
DISADVANTAGES
To be able to purchase on a centralised exchange, a large amount of personal data is requested and retained by the platform, such as bank account details, identity, and home address. Stored on central servers, all the information is at risk of being hacked and used fraudulently.
The second significant disadvantage is that the central platform holds your funds and your private key—not you. They need both to act on your behalf; otherwise, they wouldn’t be able to manage transactions. However, in doing so, they also control what sales can and can’t take place. Since their conception, centralised exchanges have been shut down in numerous countries. If your tokens are being held at the time, there is no refund process unless the exchange is insured. This makes for risky business.
Nobody likes fees, but to be able to operate, centralised exchanges take a percentage of each transaction. Although no different to how a bank works, the whole point of cryptocurrency is to avoid the pitfalls of traditional institutions.
DECENTRALISED EXCHANGES
Popular exchanges include:
• IDEX
• IDAX
• StellarTerm
• Radar Relay
• OasisDEX
ADVANTAGES
No middleman means no extra fees, and no consent needed before initiating a transaction. The control is placed in the hands of the individuals who want to complete a transaction, and no one else. Decentralised exchanges also feature significantly higher levels of security compared to their centralised counterparts. Token wallets and private keys can be stored offline, substantially mitigating the risk of being hacked.
There is no central body, which means they cannot be shut down by a regulatory authority or government agency. DEXs also don’t need the same level of personal information. You only need to provide proof of identity to the individual with whom you have chosen to trade.
DISADVANTAGES
Exchanges need users to be successful. Without individuals to trade, their purpose is moot. Currently, the prevalence of centralised exchanges means conducting business on a decentralised exchange is difficult. Slow transaction times, less liquidity, and low trade volumes deter widespread adoption.
Decentralised exchanges lack the same level of functionality as their counterpart; no fancy trading tools, just good old-fashioned peer-to-peer agreements. Their lack of popularity also makes it difficult for newcomers to utilise the platform. Interfaces can be less than intuitive and don’t support fiat currencies.
EXCHANGES THAT HAVE FALLEN VICTIM TO HACKS OR SCAMS
When a system exists solely in a digital environment, it will always be prone to hacks or calculated attacks that could compromise its integrity. However, centralised exchanges do present traders with far greater risk. Centralising information on a server or database makes the fraudulent use of personal details or token balances far easier.
Even the biggest exchanges in the world have fallen victim to hackers. In 2014, Mt. Gox (Magic the Gathering Online Exchange) handled 70% of the world’s bitcoin transactions. With so much value in one place, you could argue it was only a matter of time before the exchange would be targeted. Mt. Gox suffered two significant hacks. The first, after an auditor’s computer was hacked, and the second, when hackers managed to alter code before transactions could be verified on the blockchain. The total of all accounts affected was $481,750,000. The combination of attacks and poor process management at Mt. Gox nearly bought Bitcoin to its knees. Thankfully, it has since recovered, and Mt. Gox is no longer trading.
CENTRALISED PLATFORMS CAN REDEEM THEMSELVES
Another infamous hack resulted in the second largest loss of bitcoin. A loophole was exposed with the process that underpins a multi-sig wallet. Multi-signature wallets rely on having several private keys, rather than one. However, to authorise a transaction, the majority of private keys have to agree. If there were three private keys to one wallet, you would need at least two of them to complete a transaction. In the case of Bitfinex, they held one key, the multi-sig wallet provider held another, and the final private key was stored on a server as a backup.
The exact cause behind the loss of $72 million worth of bitcoin is still unknown. The most popular theory assumes that hackers managed to access the backup key, before convincing BitGo (the multi-wallet provider) that they were legitimate, giving them access to their copy of the private key. With a majority, they were able to withdraw the funds legitimately. And yes, before you say it, Bitfinex is still listed above as one of the most popular centralised exchanges. All the affected accounts were eventually refunded and the platform recovered.
WHERE WILL YOU FIND REBL TOKENS?
Whether you decide to use a centralised or decentralised exchange, both come with unique advantages and disadvantages. There is no denying that the popularity of centralised exchanges like Binance and KuCoin make them an appealing choice. It is worth considering that with increasing government intervention in centralised exchanges, their viability as a future trading platform could be at risk. A decentralised exchange cannot be shut down because there is no controlling entity, just a network of nodes.
Regardless of the future landscape of exchanges, if you want to use either to acquire REBL tokens, you are in luck. At the moment, REBL is available on the centralised exchanges Bit-Z and UPcoin, while decentralised users can find us on IDEX, Token Store, BitoxIO, Ethershift and TokenJar. In the future, REBL will also expand to ETERBASE and Next.Exchange. ETERBASE being another centralised platform and Next.Exchange being a hybrid one. As Rebellious continues to grow, our pioneering crypto token is always seeking new opportunities.