In fact, the very design of a centralised exchange with its security flaws and proof-of-identity burden it places on its users is practically the opposite of what bitcoin was created for and fails to capitalise on the freedoms we can achieve with cryptocurrencies – like local currency stablecoins which are considered the next frontier of crypto innovation.

Using cryptocurrencies removes the reliance on third parties, such as banks or centralised exchanges, that require users to trust them with wealth and privacy to mediate transactions. The design of cryptocurrencies enables peer-to-peer transfers based on cryptographic proof which cuts out the middleman, who demands trust, and instead empowers the individual. With crypto, the users themselves are in charge of keeping their funds safe in their own wallets, where no third party or central authority can tamper with it. It essentially means that when you use crypto, you are your own bank.

This is the ethos of cryptocurrency and using centralised exchanges is in direct contradiction of this new way of thinking. As soon as we use centralised exchanges, they become the custodians of our funds and we give up all control.

The rise of centralised exchanges

Despite the fact that centralised exchanges practically take out half the benefits gained from using cryptocurrencies, they are becoming increasingly invasive with a steady stream of newcomers joining the fray and further crowding the market. One of the key driving forces that enabled the rise of centralised exchanges were the expectations held by the mainstream crowd that joined the crypto community.

What attracted early pioneers of crypto traders – anonymity, peer-to-peer transactions, managing their own funds – didn’t appeal to the new crowd at all. They were more interested in the profitability of holding crypto assets and were more comfortable with a third party responsible for securing their funds and trading through systems with familiar interfaces and designs. If you’re used to trading securities on a stock exchange where a central authority clears and settles trades between parties within a few days, then a centralised crypto exchange where trades are near-instant is a major upgrade. But like the ASX blockchain upgrade which preserves the original centralised design, it kind of misses the point.  

The fall of centralised exchanges

Centralised exchanges are facing a number of different challenges on different fronts, and the combination will ultimately spell their demise. Some of these include:

• Security flaws: Users that buy cryptocurrencies on centralised exchanges actually don’t own them. The organisation running the exchange stores them with the funds credited to the user’s account. The user doesn’t even have the private keys to their wallets. This design essentially puts a giant target on the exchange and explains why there have been so many exchange hacks with Mt. Gox being the most infamous robbery where 850.000 bitcoins were lost.
• Identity documentation: Anyone that wants to trade on centralised exchanges needs to submit multiple proofs to verify their identity and registered address. Some exchanges even require facial recognition where users have to hold up their passport next to their face using a webcam. Not only does it go against the anonymity that crypto provides, it exposes users to identity theft when hackers get into the system.
• Poor support: Anyone who has ever used a centralised exchange knows this, and if not, reading only a few reviews will tell you: centralised exchanges have terrible customer support. Just because the front-end looks like a familiar consumer-friendly service, don’t expect any real customer support or transparent communication when something goes wrong.
• Government bans: Some governments have decided to shut down the crypto market for varying reasons, likely until they have regulations in place that preserves their stake in cryptocurrencies i.e. control supply and tax earnings. The recent ban on exchanges in China has shown how easy it is for a government to shut down centralised exchanges.
• ICO market: While the ICO market is still booming, many centralised exchanges aren’t listing new ICO token sales because of increasing regulatory pressure from financial regulators that view tokens as securities that need to satisfy a number of requirements. This results in liquidity issues for companies running an ICO if they were to solely rely on centralised exchanges for distributing their tokens, which is why many are listing tokens on DEXs instead.

While centralised exchanges have been instrumental to introducing cryptocurrencies and blockchain to the masses, they don’t reflect everything that’s possible with the technology and certainly fail to achieve what Satoshi envisioned.

In fact, everything points towards the imminent downfall of centralised exchanges and the emergence of decentralised exchanges. The future of the crypto market will be led by decentralised exchanges, exactly as it was intended by the crypto pioneers in the early days when bitcoin was just an obscure digital coin.

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