Cryptocurrencies

How Blockchain Solves Trading Security and Fairness Problems

How Blockchain Solves Trading Security and Fairness Problems
Written by Julia Beyers

Blockchain was invented as a basement for Bitcoin, the world’s first cryptocurrency. Since 2009, the crypto world has evolved, introducing blockchain to the unlimited range of industries. Decentralized networks with enhanced security are applicable to any sector of modern economics, from IoT to real estate. However, trading is an area of the biggest interest at the moment.

Exchanges facilitate the trading process and allow more users to get some coins, make profits on them, and invest in blockchain-based projects. Let’s dig into how modern platforms function and what challenges they face.

Crypto trading evolution

Cryptocurrency exchanges remain the main entry gate for people who want to trade digital assets. At first, we were limited to centralized exchanges (CEXs) – websites which are based on a single server. Now, CEXs are highly popular because they are simple, user-friendly, and fast. These platforms are a great option for newcomers, as they don’t require knowledge of blockchain or skill mastery.

Decentralized exchanges (DEXs) are gaining popularity. They are closer to the original idea of cryptocurrency in terms of their operating principles. They function like peer-to-peer networks which match traders but don’t store their money. That’s why these platforms are way safer and more transparent: their users don’t have to deal with third parties. However, decentralized exchanges remain too complicated for newcomers. They also suffer from comparatively low trading volumes, but it’s considered to be just a matter of time.

The ideal marketplace should meet three following requirements:

  • High speed: transactions should be nearly instant to minimize price changes
  • High security: users should control their money during the whole trading process
  • High transparency: all activities should be public and visible for everyone

Blockchain is the key for fair and secure trading. Thanks to its development, exchanges evolve all the time: the community defines three stages of this process.

   

Exchange 1.0: early centralized platforms

It’s the very first step in the evolution of crypto markets. With centralized exchanges being vulnerable to attacks due to central servers and storages, hackers can be extremely successful: there have been a lot of incidents, including the one with Mt. Gox losing crypto worth of nearly $700 million. CEXs failed to meet some of the key requirements mentioned above.

Exchange 2.0: CEXs and DEXs

After numerous breaks and hacks, the crypto community realized all the dangers centralized exchanges could face. Thus, a brand new type of marketplace called DEX was designed. Decentralized exchanges had to solve security issues and make the trading process safer. But users have prioritized the speed and simplicity over the idea of decentralization, so CEXs still remain more popular.

To meet the needs of all customers, advanced centralized exchanges use off-chain solutions to enhance their security. However, they fail to reach the perfect publicity of transactions. Generally, exchanges of this era are able to deliver speed, security, and transparency to the extent which might be enough but not the fullest. Today, it’s extremely important to improve these platforms to attract institutional investors to the market and make trading more convenient and protected.

Exchange 3.0: ideal decentralization

Theoretically, it’s possible to design a new type of crypto exchanges. Exchanges of the future are based on public chain solutions with simple transparent interfaces. Ideal platforms should combine the best features of CEXs and DEXs to attract the majority of traders. It’s difficult to create such platforms at the moment, though.

Steps to launch brand new exchanges

The current state of crypto trading markets is unclear. Most people prefer traditional centralized exchanges because of their user-friendliness, while crypto geeks claim that future belongs to DEXs. To enter a new stage, the industry has to push the idea of decentralization even further. For instance, markets should place order books on public blockchains to make trading actions transparent without losing in speed.

There are a few other actions which can speed up the emergence of new exchanges:

  • Understandable interfaces: new traders and investors will move to DEXs if they understand how to use these platforms
  • High trading volume: exchanges have to expand greatly
  • Independence: services shouldn’t be influenced by governments

We can expect significant changes to happen over the next few years. It all depends on demand: developers will try harder if they see the request from the community.

Future prospects

Currently, blockchain-based marketplaces for crypto trading ensures the secure and fair process. Decentralized networks feature advanced encryption and don’t rely on central storages, so hackers are barely able to steal any data or money. Existing DEXs include public reports and fully transparent records which boost the trust between traders.

However, it’s far from perfect, as DEXs are relatively slow and don’t have enough trading volume. In the future, blockchain developers will be able to launch websites which will bring speed, security, and transparency of transactions to a new level.

About the author

Julia Beyers

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