Centralized Exchanges Have a Major Problem

By Stan Peterson
Published July 5, 2021 Updated July 5, 2021
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Centralized Exchanges Have a Major Problem

By Stan Peterson
Published July 5, 2021 Updated July 5, 2021

In an industry founded upon the tenets of decentralization, it’s often an unwelcome discovery when investors realize that a large chunk of cryptocurrencies is actually stored in centralized wallets held by centralized exchange platforms — like Binance, Huobi, and Kraken. 

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These platforms offer a great deal of utility to users, by allowing them to speculate, stake, and access a variety of novel products from a single interface. But what people often don’t know, is that this convenience comes at a great cost that can easily be avoided. 

The Limitations of Centralized Exchanges

It’s convenient to store cryptocurrencies in a place where they can also be directly used for trading — such as a centralized exchange — since these allow users to avoid transaction fees by simply reallocating user funds using a centralized database without actually making any on-chain transfers. 

But while centralized exchanges are simple to use and are frequently the first port of call for new investors and traders, they come with a slew of downsides, which are gradually damaging their desirability among users.

Chief among these problems is the fact that they’re centralized. Not only does this pose a security risk, since a large sum of user funds are concentrated in a single place to create a large target for hackers, but it also means these exchanges are subject to the whims and wills of the governments of the jurisdictions in which they operate. 

This problem was most recently seen when Binance — the world’s largest cryptocurrency spot exchange by trading volume — was forced to shutter its regulated activities in the UK by the country’s financial watchdog, the Financial Conduct Authority (FCA). 

Being centralized, these platforms are also able to effectively restrict who is and isn’t allowed to use the platform, while also potentially offering preferential access to larger institutional traders through so-called co-location services and dark pools. Though this might seem reasonable on the surface, it becomes particularly problematic during high traffic-induced downtimes, since large operators may retain continued access to the order books, while public traders face potential liquidation and cannot manage their orders reliably. 

Unfortunately, this most commonly occurs during extreme price movements, leading to a great deal of frustration by those that are adversely affected by the downtime — such as being liquidated or being unable to place orders. Since centralized exchanges do not allow users to access their own private keys, users have no choice but to wait until the exchange resumes services before they can access their funds. This problem has helped to fuel the “not your keys, not your coins” movement — which urges users to avoid platforms that require custody of the private keys. 

The Decentralized Option

Though centralized exchanges currently remain the most popular way to buy and trade cryptocurrencies today, they are rapidly losing steam to decentralized platforms — known as DEXs. 

As their name suggests, these platforms do not rely on any centralized intermediaries to function, and as a result, aren’t answerable to any government or company. Instead, these are typically decentralized protocols that can be accessed by anybody at any time. Because of this, they’re completely free of censorship and regional restrictions.


But while decentralized exchanges have been rapidly gaining popularity among traders, they still only handle around 14% of cryptocurrency trades — despite more than tripling their market share in a year. One of the major reasons decentralized exchanges haven’t yet caught up with centralized platforms in terms of trading volume comes down to the simple lack of fiat support. While the vast majority of DEXs support fiat-backed stablecoins like Tether (USDT) and USD Coin (USDC), few (if any) support real fiat purchases. As a result, they only really appeal to those already exposed to digital assets.

But thanks to the advent of a new kind of decentralized exchange known as Polkadex Orderbook, that might soon be set to change. 

Built on the high-speed Substrate platform, Polkadex Orderbook is set to become the first DEX to support fiat-crypto purchases, thanks to a pioneering new decentralized KYC service. Once live, users will be able to purchase a huge variety of cryptocurrencies using their debit or credit card, without ever risking their privacy or passing their data through a centralized provider. 

In addition, Polkadex Orderbook is set to bring advanced features like on-chain trading bots, decentralized asset delegation, multiple user wallets, and trustless cross-chain transfers to users — potentially making it the first decentralized exchange to actually exceed the capabilities of centralized platforms. With none of the common drawbacks to boot.

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Disclaimer
The presented content may include the personal opinion of the author and is subject to market condition. Do your market research before investing in cryptocurrencies. The author or the publication does not hold any responsibility for your personal financial loss.
About Author
Stan Peterson
314 Articles
Being an active participant in the Blockchain world, I always look forward to engage with opportunities where I could share my love towards digital transformation.

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