Are centralized exchanges just a technological stepping stone to decentralized exchanges?
By Vanessa Malone
In the world of blockchain, and its first use case cryptocurrencies, exchanges play a crucial role as the hubs where investors go to buy and sell their cryptocurrencies.
Today, the majority of trading occurs on centralized exchanges. Currently, the total market cap for cryptocurrencies is ~$208 billion with more than 2,300 cryptocurrencies trading on a daily basis.
What’s interesting is that the idea of centralized crypto trading hubs contradicts a core founding principle of blockchain, decentralization. A blockchain is a decentralized, distributed ledger which enables people to transact directly with one another. It removes the need for a “centralized,” trusted authority.
Contrarily, a centralized exchange utilizes a middleman to conduct transactions and hold a customer’s assets. It’s ironic because this requires traders to put their trust, and private keys, in the hands of a central authority.
As evident in the volume of trading, traders are willing to give up control of their crypto assets in exchange for liquidity. The problem is that whoever controls the private key controls the assets. This centralized mass storage of private keys and valuable assets has become severely prone to attack.
All this said, it seems that centralized exchanges could just be a technological stepping stone to decentralized exchanges, especially for blockchain securities.
The current state of the markets
In today’s securities markets, investors can experience slow settlement times, market-makers, and limited transparency in a centralized trading environment typically catering to high-frequency traders.
Then we have cryptocurrency trading hubs where we’re seeing all sorts of market manipulations, hidden fees, issues with getting fiat back out of the exchanges due to correspondent banking issues, and so on.
Cryptocurrencies are just one use case of blockchain. Another compelling use case is blockchain-based securities, called digital securities or security tokens. Just like with centralized cryptocurrency exchanges, centrally trading securities will also lead to a lack in investor protection, user-friendliness, security, and be prone to attack.
The future of trading
However, blockchain securities markets are evolving, and at the forefront is decentralized trading technology. We believe our proprietary blockchain trading software Open Order Book, as licensed by regulated entities around the globe, will be used to power the next generation of decentralized securities exchanges.
Open Order Book pairs with a retail trading app where investors of all levels can buy, sell, and instantly settle digital assets directly from their smartphone. It’s not just a simple wallet to wallet matching engine. The marketplaces powered by our software are designed to look and feel like traditional public marketplaces with best bids and offers displayed in real-time on the Ethereum public blockchain. Investors can execute a series of trading strategies including Buy, Sell, Stop Loss, Trailing Stop Loss, etc.
In addition to its user-friendly interface, Horizon’s “blockchain integration” of a regulated securities custodian, or transfer agent, solves for the gaping issue of legitimate custody present in decentralized exchanges. In short, decentralized assets are stored in a users smartphone wallet app and are protected solely by a users private key. The problem is if a private key is lost, stolen, or forgotten, then the assets are no longer accessible for trading. Having a regulated custodian engaged by the securities issuer means that a parallel record of all asset ownership can be maintained by a regulated entity. This way in exceptional cases, such as a lost private key, assets can be lawfully restored to their rightful owner by the issuer’s custodian.
Another issue prominent in today’s centralized exchanges is the increasing KYC/AML compliance requirements. Open Order Book integrates our smartphone compliance technology to enhance and complement these regulatory requirements while maintaining a frictionless user-experience for primary investors and secondary traders alike.
Our goal — to allow securities issuers to efficiently raise capital and increase secondary liquidity potential for investors by rolling-out an interconnected network of compliant trading venues that have global reach combined with a locally regulated presence.
We are clearly still in the early days of the evolution of industries enhanced by blockchain technology. Horizon strives to fuel growth and further adoption with its suite of blockchain software solutions.
To learn more about Horizon’s one-stop-shop for digital securities technology, please visit https://www.horizon-globex.com/.