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Centralized order-books with decentralized settlement

Pierre Tavernier
Pierre Tavernier

CMO Paymium.com and Blockchain.io

The Bitcoin blockchain was created in 2008, in conjunction with the global financial crisis. As banks and big financial institutions were criticized for being reckless with people’s assets, Satoshi came up with a decentralized solution for currency exchange. The blockchain relies on a peer-to-peer technology and does not involve a third party as an intermediate to transfer value. The system is completely separate from the bank and relies only on the Internet. Decentralization is one of the main reasons bitcoin is so popular.

Yet, nowadays, a majority of cryptoasset trading platforms are centralized, which might seem to negate the purpose of a decentralized form of money. Let’s take a quick look at how centralized and decentralized exchanges work and their respective benefits.

Most crypto-exchange platforms rely on centralized technology

Centralized exchanges (CEXs) are online platforms providing third party technology to operate transactions between crypto or fiat currencies. Users do not own the private keys of the wallets securing their funds and the transactions are executed through a centralized server.

The greatest benefit to centralized platforms is trading cryptocurrencies with shorter delays and higher liquidity.

A relatively short pending transaction is the №1 reason why most users favor centralized exchanges. In order to generate a new block, each and every bitcoin transaction needs to be confirmed in the blockchain. For the sake of algorithmic security, a transaction requires at least 6 blocks to be confirmed. Since each new bitcoin block takes approximately 10 minutes to generate, at least 1 hour is needed before any transaction can be confirmed. With CEX technology, traders trust a third party technology with their coins to benefit from internal account transfers which are executed within seconds.

A high trading volume and a high liquidity are additional reasons. Until now, most of the exchange market has been based on centralized technology, therefore these platforms have a very large user base. CEXs have high liquidity making it easy to find a counterparty for any trades made.

In addition, centralized exchanges can support fiat payment, which is not the case with decentralized platforms.

In spite of these 3 main benefits (liquidity, delay shortening and the possibility to exchange fiat currencies), there is one problem with CEXs: they are much easier to hack than decentralized exchanges.

Decentralized Exchanges Imply Greater Security In Crypto-Trading

A decentralized exchange (DEX) is a peer-to-peer exchange, with users enjoying total control of their funds, and the ability to trade directly from their own wallets with on-chain settlement without the supervision of any central authority. Transactions can be executed on smart contracts and atomic swaps using what is known as Hashed TimeLock Contracts (HTLCs).

DEXs are less vulnerable to attacks because corrupting a peer-to-peer blockchain would require an exceptional amount of energy, which is discouraging to most. A group of miners would have to take control of more than 50% of the network’s mining hash rate to own the blockchain and embezzle funds.

DEXs are still in their infancy. They are not as user-friendly as CEXs. They do not offer as many functionalities, nor do they offer the same liquidity. But they do offer the level of security and transparency that the first 2008 bitcoin enthusiasts expected. Does this mean that all cryptocurrency traders should let go of their CEX accounts? Definitely not. A cryptocurrency trader should have it all: liquidity, low-latency and security. So how can he or she manage to accomplish this?

Centralized exchanges with decentralized settlement offer both liquidity and stronger security

A new generation of exchange platforms, combining the technology of a centralized custodial exchange with a decentralized “trustless” cross-chain “fair exchange” settlement might very well be the best solution. Users enjoy the efficiency of a low-latency, fully-featured centralized exchange when they need quick and liquid trading for exchanging big volumes, and they are able to turn to decentralized options if they feel like settling a transaction without the supervision of a third party, and thus, without counterparty risk. This will represent a big departure from traditional markets and a major step forward in the Internet of Value.

The Blockchain.io platform will combine a centralized custodial exchange with a decentralized “trustless” cross-chain “fair exchange” settlement. The centralized exchange will be low-latency and full-featured, with custody services, centralized order booking and efficient order matching.
The decentralized cross-chain settlement will be based on cross-chain atomic swaps, i.e. cryptographic protocols that allow users to settle transactions across heterogeneous blockchain networks without a third-party and without counterparty risk.

A credible cryptocurrency exchange must encourage trade while ensuring trust. A centralized exchange with a decentralized settlement will do just that.

Pierre Tavernier
Pierre Tavernier

CMO Paymium.com and Blockchain.io

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