In 2019 there is a clear movement towards decentralized exchanges (DEX). Even large centralized exchanges seem to be heading in this direction. This move may seem somewhat counterintuitive for the centralized exchanges already in place. So why the transition? Two words: Security and freedom. To that end, Blocknet has built Block DX, a solution that provides both security and freedom and is a real-world manifestation of the original ideals of Satoshi Nakamoto and represents a real, truly decentralized DEX (rather than simply using the term as a buzzword as many other exchanges do).
When a centralized exchange is hacked, it is bad for everyone. Not just the exchange itself, but also the users who lose their money. For example, Binance lost over $40 million worth of Bitcoin yesterday. In a wider context, this results in bad press for cryptocurrencies as a whole and the market will usually react negatively, pulling down the Bitcoin price as well as other cryptos. Because centralized exchanges have off-chain trading that use an IOU trading system, user’s funds are vulnerable to attack because they are centralized in hot wallets. What this means is that while your funds reside on a centralized exchange, you are not in control of them as you do not hold the private keys, which exposes the potential to have funds hacked. At the start of 2018, over $500 million in XEM was hacked and stolen from the Coincheck exchange. More recently, a Korean exchange was also hacked, as well as the Cryptopia Exchange. There is also the concern of losing access to the private keys holding users funds as seen with Quadriga CX taking a $135 million loss. Over the years there have been many such hacks and attacks on centralized exchanges, MT Gox being the most infamous with 850,000 bitcoin stolen.
Centralized exchanges are now realizing that the solution to these attacks are decentralized exchanges. Fortunately, this problem was foreseen by Blocknet back in 2014. Blocknet has since created the Blocknet Protocol, which enables decentralized exchange and communication between different blockchains. The exchange component is designed to decentralize the four elements of exchange: storage of funds, order books, order matching, and settlement. Each of these elements are completely decentralized on the Blocknet Protocol and accessible to any exchange or application via simple APIs. This means existing exchanges could leverage the Blocknet Protocol to integrate decentralization into their current systems or create a sister exchange that is fully decentralized. All these services built on the Blocknet Protocol may also share the same orderbook, enabling access to an enormous liquidity pool.
Binance recently moved its operations from the Asia Pacific areas to Malta. This move afforded them more legislative freedom because Malta is very progressive when it comes to crypto regulation. But why was the move necessary in the first place? Isn’t the whole purpose of Bitcoin and crypto to give decentralized freedom to everyone, regardless of where you are? Unfortunately, the traditional centralized exchange model limits freedom because it exists in a centralized location, where rules and restrictions apply for custodial services. In a decentralized crypto-ecosystem, exchanges can be built on a technology that does not have regional limitations or barriers and that everyone can access.
The Blocknet Protocol makes the creation of decentralized exchange services possible for any project. Through Blocknet’s innovation, there is a decentralized infrastructure powered by a growing worldwide network of 450+ Service Nodes that ensure every aspect of the Blocknet Protocol is without any single point of failure and available to all. Every project that taps into the Blocknet Protocol has the freedom to innovate without restrictions. For example, Cloudchains, Inc. is currently implementing the world’s first fully decentralized lite (thin) multi-wallet utilizing Blocknet’s XRouter, the communication component of the Blocknet protocol. This means you will be able to trade without having a blockchain installed in a 100% decentralized way. This is true decentralization in action!
THE SNOWBALL EFFECT: EVERY EXCHANGE BENEFITS EVERY OTHER EXCHANGE
Instead of every crypto exchange fighting for traction and liquidity in a bear market, what if each exchange could benefit from one another? Just as more water will cause all ships to rise, the Blocknet Protocol is intentionally designed so each new application or exchange, grows the ecosystem for everyone. The first dApp built on the Blocknet Protocol is Block DX, a truly decentralized exchange that will be of mutual benefit to all other exchanges. Because Block DX has decentralized the four main elements of exchange, (see below) it is 100% decentralized rather than being a hybrid or partially decentralized exchange. Block DX stands as an example of the capabilities that any exchange could enable. Here are some ways that exchange technology could benefit from the Blocknet Protocol:
- Shared order book/liquidity pools. Sharing the order books will improve the liquidity pool for each exchange that shares its order books with Block DX.
- White-label exchanges. Creating a white-label exchange would be very helpful for the average joe who is not well funded enough to start their own exchange. Using the Blocknet protocol as the starting point, this will save time and money and will help them achieve liquidity.
- OTC and dark pools. OTC, over-the-counter, is a private marketplace for investors, whales or brokers that often have backing from large financial institutions or companies. OTC and dark pools allow for very large trades without impacting the market. Using Blocknet, exchanges could offer private order books to large volume traders across multiple blockchains.
- Rebalancing. Centralized exchanges usually have a reserve of most currencies that can be traded on their platform. This is because in the event that users all decide to withdraw a specific currency at the same time, centralized exchanges need to be sure they have enough in reserve to cover this. However, whilst they may have enough to cover this eventuality, it’s very likely they would need to rebalance their reserves of this currency. They could achieve this on private order books via Blocknet.
- Scalability. The very nature of centralized infrastructure and service provision leads to downtime during times of excessive trading which can be extremely frustrating. It would suit centralized exchanges to integrate Blocknet to help prevent this. By the protocol’s very nature, scaling would not be an issue as Blocknet is extremely unlikely to reach a point of overload. This is due to the architecture of the robust and decentralized network.
- Security. Blocknet has inbuilt DOS protection and orderbook verification, along with various checks throughout the exchange process.
- Trustless. No third party is ever in possession of your funds and you trade directly wallet to wallet.
- Private. There is no requirement for KYC or AML on Blocknet because no 3rd party service or technology is managing your funds.
- Unlimited dApps. Using Blocknet as a layer 2 protocol enables the creation of a multitude of cross-chain dApps and blockchains only limited by developer’s imaginations.
100% DECENTRALIZATION IS POSSIBLE
Block DX utilizes the Blocknet Protocol to decentralize the four main elements of trading making it 100% trutless, avoiding the shortfalls of hybrid or partially decentralized exchanges.
- Storage of funds: Your funds remain in your wallet and are in your control throughout the entire trade process. There is no use colored coins or proxy tokens.
- Order books: Orders broadcast directly from the trader and the order book is compiled locally instead of relying on a central order book service, which prevents front running.
- Order matching: Orders are matched directly between traders. When one accepts another’s order, the exchange process automatically begins, and this is broadcasted over the inter-chain network.
- Settlement: There is no involvement of a third part or intermediary when a trade takes place (unlike a centralized exchange). At the moment of the trade, an atomic swap automatically takes place, ensuring your funds are in your possession at all times and always under your control.
Block DX is just the tip of the iceberg of what is possible for any exchange service. The Blocknet Protocol can enable new levels of security and freedom through true trustless decentralization. With the Blocknet roadmap progressing fast, Block DX is ready for mainstream adoption to showcase the power of a truly trustless ecosystem. You can watch a 5 min set up video here and download it to start trading here. Decentralization minimizes the risk of attacks by bad actors and doesn’t exclude anyone based on their location, thus making Block DX secure and accessible to all. Blocknet enables the original vision of Satoshi Nakamoto of a decentralized token economy, providing a platform for the mutual benefit of all who build on it and use it. The Blocknet Protocol is permissionless and has been created to be utilized by all.
Originally Published on CCN 08/05/2019 : https://www.ccn.com/exchange-hackings-security-and-freedom-why-would-traditional-exchanges-embrace-a-decentralized-exchange