Crypto is down. Badly. Bitcoin is at its lowest value in 18 months and fellow coins aren’t fairing much better. The downturn is cause for concern – and not just because of asset devaluation. Rather, investors should reconsider exactly where they are trading their crypto and how they are storing it.
In today’s vicious bear market, the dangers of centralized crypto exchanges (CEXs) come to the fore. Case in point: Coinbase, one of the largest CEXs, was recently forced to report in its first-quarter earnings that it will
Investors should exercise caution and turn to what made blockchain so great in the first place: decentralization. Let’s explore.
Eliminate Interference From Outside Players
First, let’s take a step back and consider the current state of CEXs. Unlike the world of centralized finance – like banks, hedge funds and corporations – there are few rules of the game when it comes to crypto trading.
Because crypto is relatively new, and regulators are still unsure how to legislate, centralized crypto trading doesn’t count many – if any – of the frameworks that govern centralized finance. Again, in the world of centralized finance, there are intermediaries, brokers, settlement networks and more that must interact with one another to the letter of the law. On the other hand, CEXs largely don’t have such oversight.
It’s for this reason that critics describe CEXs as “black boxes” – the truth of what’s going on behind closed doors is anyone’s guess. It’s also for this reason that crypto buyers should exercise due diligence when trading or storing assets on these platforms. As mentioned above, CEXs could claim your coins in the event of bankruptcy. Likewise, because it’s hard to say what’s going on inside of the black box, bad actors can abuse their power and manipulate the market.
Return Crypto’s Core of Transparency
Unfortunately, there are plenty of anecdotal reports of CEXs taking advantage of traders. From moving orders to the front of the queue and filling them first in the matching engine to manipulating liquidation rules to profit from buying out liquidated positions, CEXs can and do manipulate at will. Of course, acting in this way in the stock market is illegal. In the wild west of crypto, however, there’s little stopping exchange creators from abusing their position for profit. For example, nobody truly knows how the matching engine operates at CEXs. These platforms can move prices and trades as they choose and face little regulatory pressure to change.
As a result, there are growing calls for traders to return to crypto’s core of transparency and use decentralized platforms. As the name implies, decentralized exchanges (DEXs) fulfill one of the blockchain’s core features: fostering financial transactions that aren’t officiated by any centralized governing body, but rather open-source code.
Consider a peer-to-peer (P2P) decentralized orderbook-based DEX. Unlike many of the current DEXs solutions which rely on AMM (automated market-making model) and P2C (peer-to-contract), P2P trading built on top of the blockchain solves two critical problems. Firstly, transparent and verifiable trading rules. Secondly, much better asset pricing and lower slippage as market forces of supply and demand between users determine the equilibrium price of the asset.
Prepare For The Future of Decentralization
The message is clear for crypto traders in this moment of madness: be careful. CEXs might have been at the heart of developing the crypto market as we now know it, but they often abuse their power over users to generate abnormal returns. Moreover, the way these platforms operate is contradictory to the ethos of crypto. You, the user, should be in charge of your assets. So, if you do decide to purchase crypto with CEXs, be sure to (safely) store your assets away from the platform itself.
This market downturn should serve as a wake-up call. I’m sure many investors aren’t aware that the largest names in crypto trading can potentially claim their assets overnight. Nor are they likely aware that backend dishonesty occurs regularly. If you are new to crypto, my advice is to learn as much as possible about the decentralized world since this is where you are more protected.
This isn’t to say DEXs are perfect. Far from it. There is still work to be done to improve the speed and reduce the cost of trading to compete with CEXs. In the long term, though, the decentralized model is the way forward. If you are truly interested in crypto – as well as trading other asset classes in the future like foreign exchanges, commodities, and stocks – this will happen with decentralized finance (DeFi). Get ready for tomorrow, today.
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