One of the reasons people love the blockchain is because most of it is decentralized. This decentralised property is the reason that Bitcoin has rallied multiple times over since 2011.
Of course, some coins like Ripple XRP (and likely also the future Crypto-Ruble), are and will be centralized. However, the overall spirit of the blockchain and its strength is its decentralization. No third parties have control over your data or have their hands in making important decisions in your financial life.
Decentralization makes almost all the cryptocurrencies transparent and secure. Unfortunately though, when you buy your first cryptocurrencies, you have to go through a centralized exchange that operates almost exactly like the system you stopped wanting to deal with in the first place. This is a major contradiction since the blockchain actually makes it possible to decentralize everything it interacts with or everything that’s digital.
What are CFD Brokers?
If you merely wanted to trade on the movements on a range of cryptocurrencies and make profit on the daily changes, then you could either buy the underlying cryptocurrency on an exchange or you coul use a CFD broker.
CFDs are Contracts for Difference. This means that they calculate the difference in the price of the asset at the end of the day and the determine how much is owed to the trader.
They are also levered products which means that the trader can take a large position in the asset with relatively little money that has been laid down for the margin.
You also need to make sure that you locate a broker that has adequate liquidity to back up your positions. Also, if there is a trading outage it can really hurt your position.
There are a range of different cryptocurrency CFD brokers but what is important is to find a regulated broker that has the oversight of some agency. One of the most well known cryptocurrency brokerages is IQ option.
They are fully regulated and you can read more about IQ option reviews if you wanted more information.
What are Centralized Exchanges?
If you’re familiar with cryptocurrencies, you likely already know many of the centralized exchanges.
The major names with the best reputation are:
- Kraken, and
Pretty much any crypto trading you can get involved with is going to take place through a centralized exchange today. These are places where people can buy and sell cryptos or trade with one another. Some exchanges offer extra services like margin lending and advanced trading.
Most exchanges are simple for anyone to use. However, you have to share a lot of personal information with them. This is because they have to follow the anti-money laundering laws of whatever country they’re based out of.
They’re supposed to store all their users’ personal information securely on the exchange and make sure it’s inaccessible to hackers and other ne’er do wells.
Almost all exchanges also deal with fiat currency like US Dollars, Euros and Yuans. Typically, users can deposit their fiat currency to begin trading cryptos. In fact, without centralized exchanges, you couldn’t turn your fiat currency into cryptocurrency.
Because centralized exchanges deal so much with fiat currencies, they have to deal with a lot of regulations and compliance. They deal with large amounts of fiat every day.
It’s also important for traders and investors to understand that once you’ve purchased a cryptocurrency, you’re not considered the direct owner. The coins go into your exchange wallet. However, technically, the exchange still owns the coins. In addition, the exchange controls your wallet keys and your coins. It’s not until you withdraw your coins to an external wallet that you have control over your cryptos.
Hackers and Big Brother, a Frustrating Threat
Whenever there’s a centralized organization that handles large volumes of currency and sensitive personal information, criminals are going to be watching. Though the exchanges do everything possible to follow top not security protocols, hacking threats are ever-evolving when it comes to targets like these. Hackers are always looking for new strategies.
Unfortunately, exchanges have been hacked in the past. This has caused major damage within the crypto community as well.
When people think of hacked exchanges, they often think first of Mt. Gox.
Hackers stole $460 million in 2011 from the Mt. Gox exchange. At the time, Mt. Gox was the biggest exchange out there.
That particular hack created a depression in the cryptocurrency market for several years.
There were hacks before Mt. Gox and there could be hacks after. Unfortunately, when it comes to centralized exchanges, hacking is an ongoing threat.
In addition, to hacking, government interference can also pose a threat to exchange users. The Chinese government forced all the exchanges in the country to stop operations.
Bitfinex and Kraken are no longer able to serve US citizens because they had to comply with a list of regulations they couldn’t. Centralized exchanges operate from one country. They are legally bound by the laws of the country they’re based out of.
Enter Decentralized Exchanges
Hackers and government interference aren’t a threat or a concern for decentralized exchanges. Basically, decentralized exchanges are designed like the blockchain itself. These exchanges are verified and secured by the exchange network. They are globally dispersed and inherently secure.
Here are some decentralized exchanges to check out:
- 0X, and
- Kyber Network
There’s no need for, “trust,” with decentralized networks. There’s no one organization or corporation that’s the center of their operation. We don’t have to trust one organization to secure our personal information and money. All trades occur from peer-to-peer. Users deal directly with one another.
Let’s say for example, you want to exchange your Bitcoin for Zcash. You place an order to, “sell,” then you wait until someone wants to buy your Bitcoin for the amount of Zcash you want to sell it for. After the trade is done, the Zcash and Bitcoin are deposited directly into your wallets and you go on your merry way.
Decentralized exchanges have no need to collect your personal data. You can create an anonymous cryptocurrency account by downloading a wallet or using a secure, web based wallet. There’s no need to share any of your PII, (personally identifiable information), with anybody or any organization.
Decentralized exchanges operate over their own networks. Therefore, you don’t have to worry about downtime with overheating servers and things like that. The network is its own server. The only reason you might experience any downtime is if all the network’s nodes stop working at the same time.
There’s no central server for hackers to target. Only individual users can be hacked, not the network or the decentralized exchange. That’s why it’s crucial to always secure your cryptocurrency and keep your passwords, pin numbers and backup phrases in secure places. Keeping a physical copy is also important.
Decentralized Exchanges Still Aren’t Perfect, However
There are a few downsides when you use a decentralized exchange. Some of them are hard to use.
Etherdelta, is very popular with those who want to trade Ethereum-based cryptos. There have been a few complaints about the exchange for its lack of user-friendliness. When you look at the coins trading on Etherdelta, you can see pretty big price spikes when users enter the wrong, “buy,” order amount. A lot of money can be lost because of this.
Things like margin lending and advanced trading options typically aren’t going to be available either. Mainly, all you can do is buy and sell cryptocurrencies.
Lastly, since most people don’t know about decentralized exchanges, there aren’t a lot of people using them. This causes their liquidity to be pretty low. There also isn’t a whole lot of cryptocurrency available to trade on these exchanges yet. Large investors usually take this opportunity to manipulate prices. When you deal with an exchange that offers high liquidity, you will typically pay a lot less.
At the End of the Day
It’s obvious that there’s a lot of demand for these exchanges. They’re growing in numbers because people are tired of dealing with a broken system just to participate with cryptocurrency. However, the decentralized exchanges are still rather new, and might still need a little work.
In addition, the pluses far outweigh the minuses when it comes to these exchanges. They truly have the advantage over centralized exchanges in so many ways. Your funds are secured by the blockchain, not some large bank or corporation. You are in control of what you do with your money. No organization tells you what you can do, or that you can or can’t trade at all.
The major things decentralized exchanges have to do is:
- Increase liquidity,
- Offer financial services that are appealing to investors, and
- Make their platforms easier for users to use.
If they fix these small things, centralized exchanges might just disappear altogether.