First Regulated Decentralized Exchange: What's in it for You?

April 10, 2019

One of the perceived aims of cryptocurrency and blockchain is the decentralization. But at the same time, the vast majority of crypto-based exchanges, are fully centralized. Network and computer power are centralized in regional servers while crypto-assets must be placed on the exchange wallets for trading, which are then reconciled when the user wants to withdraw. The exchange platform acts as a central middleman between buyers and sellers. It controls the funds. You could compare these exchanges with brokers.

But just like everything, centralization has both positive and negative sides to it. Let’s talk about the pros first:

User-friendly: individual users do not need to work or make any effort. Everything is handled by the exchange.

Recovery possible: in most cases, you can recover your funds from the exchange if you lose your password. If you lose your password, essentially most centralized exchanges have security procedures that make it possible for you to recover your password by just showing your passport copy or provide other verifying information.

Speed: centralized exchanges are fast, trades are completed almost instantly.

Liqudity: about 99% of all cryptocurrencies are traded on centralized exchangesю

Advantages are mostly about user experience and practicality. These are why most non-professional users would not bother trading anywhere else than on a centralized exchange (but in some cases, people simply can’t tell the difference between centralized and decentralized exchange). However, a much smaller subset of these exchanges are secure, reliable, trustworthy and properly regulated (most people in the industry mix-up centralization and regulation, if an exchange is centralized that doesn’t mean that it is properly regulated). Let’s take a deeper look at the problems of centralized exchanges:

Vulnerable: all the data is stored on the exchanges’ servers which are vulnerable to hacks as any other server. In 2018 alone, over $1 billion worth of crypto assets have been hacked & stolen from centralized exchanges. The most notable were:

$500 million worth of NEM stolen from Coincheck — The 2nd largest exchange in Japan;
$195 million hacked from BitGrail — Italian exchange and the first to list Nano;
$45 million hacked from Binance — One of the largest global exchanges;
$40 million stolen in Coinrail hack — A boutique exchange in South Korea;
$60 million hacked from Zaif — Exchange in Japan.

Trust: in a fully centralized model, users have to trust the company with the handling of their money and bank cards/accounts details. With such valuable data, users’ safety is always a major concern.

Privacy: users’ personal information is also stored on the companies’ servers.

Infrastructure issues: relying on servers and on a centralized platform necessarily implies that these can face troubles. For instance, servers might be down sometimes, penalizing any trader that wanted to make a move at a specific time.

Volume Problems: on the 12th of November, 2018 during a surge of volume across the cryptocurrency trading platforms, many of the major exchanges experienced delays and technical difficulties as their servers were unable to cope with the massive influx of activity.

Bithumb alone experienced a minimum downtime of 90 minutes during a peak trading period; the estimated impact is more than 60,000 Bitcoin (BTC) worth of lost trade volume. Bithumb also made an organizational decision to cancel all outstanding orders without notice and to put the exchange on pause, causing an untold loss for short-term traders, leaving them in confusion and unable to act. During this downtime, the price of BitcoinCash (BCC/BCH) almost halved in value.

Monopolistic Environment: Only a few DEXs were able to compete with centralized exchanges. That has created a market where a handful of centralized exchanges have taken up the majority share of the market. This has allowed some exchanges to charge projects millions of dollars in order for them to have their tokens listed on the exchange. Some see this as a sign that centralized exchanges are accumulating too much power and are effectively limiting the potential growth and adoption of cryptocurrencies.

Lack of regulation: Even though centralized exchanges can be easily regulated, in most cases they are not. Meaning that they have no legal responsibility to their customers.

Decentralized Exchanges

On the other side of the table, we see decentralized exchanges that solve a number of problems that exist on traditional exchanges. In most ways, DEXs are the opposite of CEXs. The same goes for their respective pros and cons. DEXs rely on peer to peer (P2P) trade, just like the Blockchain technology itself. DEXs pros translate into huge advantages:

Safe: transactions are directly happening between two users. Trading at a decentralized exchange allows you to preserve ownership of your tokens as you remain in the possession of your private keys. Funds are kept in users’ own accounts. The system is much less vulnerable to hacks than when a number of third-party servers are involved.

Trustless: users do not need to trust a third party to use it. Cutting out the middleman will also lower the transaction costs.

Fast: deals do not need a third party to agree and process them. As soon as both parties are settled, the transaction is made.

Durable: as with all blockchain solutions, data is operated all over the cloud, in each connected device. Blockchain extremely reliable innate durability is applied to DEXs.

To consider how a shift towards more users favoring DEXs may eventuate, we have to take a look at the current weaknesses of DEXs:

Lack of regulation: as most of the current DEXs are not regulated, no customer protection can exist in case of dispute during a transaction.

Unalterable: when something is added into a block of the chain, it is not possible to reverse it.

Liquidity: DEXs are not that popular yet. Therefore, there only is a low volume and liquidity available.

Our Solution

Looking at all the pros and cons of both models, in our digital assets exchange, we combined the best features of both centralized and decentralized exchanges making the first regulated DEX which includes:

  • Decentralized execution and settlement
  • Centralized client acceptance
  • Centralized asset quality assurance
  • Centralized custody of fiat
  • Hybrid custody of crypto assets.

At the same time, we believe that the main problem of both centralized and decentralized models is the lack of regulation. What’s in it for you:

Legal responsibility: we are legally responsible and not anonymous. Our exchange is owned and controlled by Tokenomica Malta Ltd., a company organized under the laws of Malta. On October 30th, 2018 Tokenomica Malta Limited informed the MFSA that it shall be availing itself of the transitory provision under the terms of Article 62 of the Virtual Financial Assets Act in relation to the following activity and/or services as a Class 4 VFA Service Provider. After the transitory period, Tokenomica Malta Limited intends to obtain a Class 4 VFA Service Provider license in accordance with the Virtual Financial Assets Act.

Quality of listed assets: Just as many other people, we are tired of countless numbers of useless tokens. We want to provide our users with quality assets only. For this reason, we thoroughly check all tokens before approving them. Any token that is to be listed on Tokenomica needs to adhere and be qualified as Virtual Financial Assets (VFAs) under applicable laws in Malta, which should be confirmed by a legal opinion from a qualified VFA agent.

Legal fiat gateway: the main problem of all DEXes on the market is the lack of legal fiat gateways. We solved this problem on Tokenomica, both crypto-to-crypto and fiat-to-crypto exchanges are covered under the VFAA, specifically under the Class 4 license of the VFAA.

Insurance: our exchange is insured to provide safety of funds for our users.

Data protection compliance: like every EU-based company we have to comply with GDPR, moreover we have appointed data compliance officer to correspond with data protection regulation.

You can learn more about our Digital Assets Exchange here, if you have any questions about Tokenomica, feel free to join our Telegram chat, we are always happy to help.