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Shortfalls and dangers of centralized exchanges

The nature of blockchain-based digital assets is based on decentralization, which is core to all cryptocurrencies. One may disagree, but most experts have no doubts about decentralized systems being the major driving force of the digital economy development. A reasonable question arises here: why are the decentralized assets (those, which should be forming the liquidity and increasing the market capitalization) being traded on centralized platforms?

In order to give an answer to this question, we need to understand the essence of centralized and decentralized system and find out, what is it that makes the difference between them and why do users prefer decentralized systems to centralized ones.

As of today, the existing cryptocurrency trading exchange platforms fall into two types: centralized and decentralized ones.

Decentralized exchanges lack decision-making centers. Such exchanges provide their users with equal trading opportunities, allowing them to trade with each other directly. This is the approach that DEEX exchange sticks to and that ensures the security of users’ funds and the convenience of their usage.

Decentralized exchanges are fairly new phenomenon for the cryptocurrency world, which represents the blockchain ideology in its full and grants equal rights and opportunities for taking part in exchange management to all the participants. It is noteworthy, that users are keeping their funds in their own wallets, not in those belonging to some third party, as it is in case with centralized exchanges. The highest possible level of data confidentiality is another great advantage of decentralized exchanges, such as DEEX, BitShares, OpenLedger and RuDEX.

However, not every decentralized exchange can boast of the extended functionality. DEEX, which is not just an exchange platform, but a whole decentralized ecosystem, offers a wide range of features, including the exchange proper, the encrypted messenger, the ICO launching platform and many other options for development in the world of cryptocurrencies.

Centralized exchanges are still very popular for a number of reasons. For instance, they usually provide their users with wide “ready-made” functionality honed from years of practice. They all, nevertheless, suffer from one huge disadvantage, which is, unfortunately, quite a fundamental one: centralization is their essence.

Risk factors associated with centralized systems

Security

The existence of a traceable center, which may be targeted by malefactors. The total amount of funds stolen from MtGox, Bitfinex and other centralized exchanges runs into the hundreds of millions of dollars.

Unfair competition

The example of BTC-E and Alexander Vinnik being accused of fraud, theft and money laundering is legendary.

The risk of being slapped with sanctions

Many customers from the countries under the U.S. sanctions cannot withdraw their funds from Poloniex exchange.

Opaqueness

Transactions are not processed on blockchain. Users do not know, how much funds are there in the exchange’s possession and whether it is solvent or not.

Trust issues

Nobody and nothing (except, perhaps, the exchange operators’ conscience) can prevent unscrupulous money managers to get away with users’ funds under the false pretext of the exchange being hacked. Besides that, false trading volume data falls in the same category, with users being deceived by highly inflated figures provided by trade bots. In addition, the same trade bots are often used in classic “pump and dump” schemes for the benefit of small groups of individuals.

This list could be made even longer, as there is no shortage of examples of similar dirty scheming nowadays. What is more disturbing is that the list will certainly be expanding in the nearest future.