There are certain risks that come with using centralized exchanges. Users are giving up control of their funds to a third party. They are exposed to all the risks that the third party is exposed to. If the exchange gets hacked, the user gets hacked. If the exchange loses the funds, the user loses the funds. Any breach that the exchange may suffer will have a direct impact on the user of the exchange.
We only have to look at the brief history of exchanges to understand some of the risks. One of the largest hacks in cryptocurrency exchange history occurred at the start of 2014 to Mt. Gox exchange and was valued $460 million at the time. Users of the exchange had to pursue legal action and still have not retrieved their funds.
Centralized exchanges also take a step away from the true ethos of cryptocurrencies. Decentralized technologies are meant to facilitate users not to have to trust in a third party. But by using a centralized exchange, we place all our trust in this entity.
However, centralized exchanges are still important. They enable users to speculate on the value of cryptocurrencies in relation to their value in fiat currency and compared to other cryptocurrencies. They also have high amounts of liquidity by being the primary place where users go to in order to exchange their crypto assets.
Decentralized exchanges aim to keep the security and privacy benefits of decentralized technology while also enabling users to speculate and trade.
Bitfinex Launches Decentralized Exchange
Bitfinex, the world’s second-largest exchange by volume, has announced last week that it will be launching a decentralized trading platform. The trading platform, Ethfinex Trustless, will be an Ethereum-based exchange.
Introducing Ethfinex Trustless – an Ethereum based trading solution placing security, privacy and control in the hands of the user.
— Ethfinex (@ethfinex) September 17, 2018
In a centralized exchange, the exchange is responsible for putting together an order book. In Ethfinex, the order book will function via an off-chain order book that connects to the Bitfinex centralized exchange. This may tackle one of the key issues with former decentralized exchanges, which is lack of liquidity. Transactions will have the final settlement on the Ethereum blockchain.
How this order book will operate in reality remains to be seen. But the key benefit of Ethfinex Trustless is it puts users more in control of their funds. There is no sign-up or Know Your Customer required. Users can connect directly via their wallet. Because users connect via their wallet, there is no need for deposits and withdrawals. This saves the users fees and time and reduces risk.
The Native Token Nectar
The exchange has a native token, Nectar (NEC). For the first two weeks, users are required to have at least one NEC in their wallet to use the exchange. The NEC token is noted to provide some visibility over who is using the platform and to provide assistance to those who need it. NEC is currently valued around $0.48, with a market capitalization of approximately $39 million.
There will be five initial pairs:
There will be 40+ more pairs added after the first provided that everything is a success. This is a limited amount when compared to centralized exchanges with many supporting hundreds of trading pairs. For example, Binance offers over 150 Bitcoin pairs, along with more pairs for Ether, USDT, and BNB.
Many of the decentralized exchanges of past have made big promises but failed to deliver. Adoption of decentralized exchanges has been limited, and many of them lack the liquidity to operate effectively. Ethfinex may offer a unique difference with the technology to connect to Bitfinex’s liquid order book. Binance is also developing a decentralized exchange and may be considering similar technology. Whether Ethfinex delivers on its promises or follows in the direction of past decentralized exchanges will be revealed with time.