Atomic Swaps and Centralized Exchanges
September 09, 2019
Atomic Wallet Atomic Swap exchange vs centralized exchanges
Transparency and decentralization of the crypto exchange without third parties has always been one of the main goals of blockchain technology. As of today, however, the situation is the opposite: most of the top crypto exchanges are centralized.
At the recent “TechCrunch Sessions: Blockchain” conference founder of Ethereum Vitalik Buterin said:
Ethereum founder Vitalik Buterin:
“I definitely hope centralized exchanges go burn in hell”.
Despite the audience reacting with laughter and ovations, centralized exchanges still remain a monopoly with security issues. Let’s take a closer look at reasons for Vitalik’s statement.
How do centralized crypto exchanges work?
All centralized crypto exchanges work on the same principle: they accept a user’s deposits on their wallets and allow the user to exchange assets as part of the deposit.
Usually, the process looks like this:
- User creates account and verification is optional. Many exchanges put restrictions on trade volumes and daily withdrawal limit for unverified users (e.g. Bittrex, Binance)
- The user creates an order to buy or sell the coin. Some also exchanges charge a fee for deposits (Bitfinex,CEX, Coinbase, Bitstamp)
- The exchange takes a trading fee to execute an order. Once complete, the user can withdraw coins to an external wallet, if necessary.
Hence, the user pays a withdrawal fee, the network fee, and a service fee.
- Trading via bots.
- Increased liquidity for popular trading pairs.
- Automated order execution.
- Friendly user interface.
- The exchange is a centralized solution unsustainable to hacking attacks, regulation, and hardware server failures.
- Custodial working principles: users must entrust their funds to third-parties.
- the exchange receives a user deposit and transfers it to a payout (hot) wallet and/or cold wallet. Hence, huge amounts of crypto are accumulated on cold wallets. Frauds can take away up to 90% of users’ deposited savings through security breaches.
- Withdrawals may be frozen due to transaction verification issues, hot wallet maintenance, lack of liquidity and so forth.
- Trading is available by predetermined trading pairs, usually BTC / ETH / USD pairs. To exchange one coin for another, users must make at least two trades.
- Withdrawal limits for unverified users.
- Delisting unpopular coins.
- Untransparent orderbook and possible falsification of trading volume.
Where’s the money?
Since the early days of Bitcoin cryptocurrency market has evolved into a sophisticated multi-blockchain phenomenon. According to coinmarketcap.com statistics, the cryptocurrency market contains over 1.5K different currencies with a daily exchange turnover of over 14 bln in USD. In addition, we should also consider the volumes of intransparent and unregulated peer to peer exchange market as well.
Almost every major exchange has ever experienced security breaches. One of the most disruptive failures was the Mt. Gox exchange collapse. It took a year for the exchange to recover. The list of the publicly known biggest failures of custodian-based centralized crypto exchanges looks impressive for an unprepared spectator:
This list is far from complete, but it gives a good picture of the security level in centralized exchanges. However, the good news is that we all can learn a good lesson and come up with some conclusions: your funds are not safe unless you own your private keys. Anyone can hack and steal them, and this process is irreversible, unfortunately.
As a reaction to the current challenges of the industry Atomic project was created — a convenient and versatile decentralized solution for the custody-free cryptocurrency trading. Atomic Wallet platform is based on a unique proprietary engine specially designed to solve its specific tasks.