There have been quite a few instances where cryptocurrency users ended up losing their funds stored in centralized exchanges. Even though the treatment of crypto funds varies and depends from a person's technical background, a combination of hardware wallet for long term usage and a mobile wallet for day-to-day management is thought as the ideal combination.
Cryptocurrency exchanges have been centralized, beating the purpose of Satoshi's creation, the Bitcoin. It is considered even more security-vulnerable for a person to hold his/her funds in an exchange rather than in a bank. So, why would a blockchain/crypto enthusiast who is thrilled about decentralization keep the majority of his/her funds in a centralized database which has access to the private keys? This really has no logic behind it. Multiple exchanges have been hacked, malfunctioned, or experienced security breaches over time such as Mt.Gox, Bitfinex, Cryptopia, Binance and more.
Remember, NOT YOUR KEYS NOT YOUR COINS.
The concept of decentralized exchanges recently emerged to tackle the inefficiencies of centralized exchanges. Even though centralized exchanges are easier to use and usually provide additional functionalities such as margin trading and the ability to transact with a wide range of cryptocurrencies, a cryptocurrency user should always take into account the degree of centralization he/she is willing to get exposed to.
A decentralized exchange does not hold the user's funds. Transactions are automatically executed on a P2P manner between participants. The most common features that decentralized exchanges operate with are:
- Proxy tokens which represent other cryptocurrency assets (or even other type of assets)
- Decentralized multisig escrow procedures
Obviously, users of a decentralized exchange are not exposed to third party risks, thereby the need to trust an entity to not malfunction, steal your funds, get exposed to hacks etc. does not exist. Furthermore, no personal details of users need to be exposed. This is only required between transacting parties, when bank transfer is used as the exchange method.
Decentralized exchanges are still not the perfect solution, as features of centralized exchanges like margin trading and limit/stop orders are not widely available. Most of decentralized exchanges require users to be online for a trade to be executed and there are quite a few regulatory concerns, so clearly we have to give some time for the concept to mature. Centralized exchanges are still essential for the buy/sell process the average user needs to go through.
The top decentralized cryptocurrency exchanges according to recent transaction volume are:
- Waves Platform
- Etherflyer
- Escodex
- Bancor Network
- Coinlim
If you have more questions about exchanges, you can learn crypto currency with Cointelligence Academy to gain a better understanding of how exchanges work.