An exchange is a marketplace where assets are traded. One famous exchange you probably know of is the New York Stock Exchange, which is one of the largest exchanges in the world, and it is centralized.

Centralized Exchanges

But what does that mean? Centralized?

It means that orders of stocks or shares are routed to the NYSE, London Stock Exchange (LSE), or any other centralized exchange, and are matched with an offsetting order. This means that all orders are taking place in one specific “location”, as they are all routed through the same place.

Say for example that you would like to purchase some Ethereum with your USD. In order to do so, you would need to transfer your funds (USD) to a centralised exchange (marketplace). After this, your USD would be converted by the exchange into Ethereum at the current exchange rate.

Centralized exchanges are good, they are easy to access and use, and provide advanced tools and trading functionalities such as margin trading, stop loss and lending.

So what’s wrong with them?

The risks of centralized exchanges.

Well, as it turns out, centralized exchanges pose a risk for your funds.
Maybe you’ve heard of people losing their cryptocurrencies and bitcoins due to hacking attacks.
Some people choose to keep their aforementioned purchased Ethereum — or Bitcoin — on exchanges, instead of transferring them to their wallets. This is mostly done for ease of access and for a quicker trade.
Although this hacking and obtaining of others’ cryptocurrencies falls on the shoulders of those who kept their assets on the exchange, as well as the exchange itself, we cannot disregard that we live in a digital world where most people and platforms are not safe from hackers, that is, if the hacker really wanted to get in.

There is, however, one solution. Decentralized exchanges.

Tell me more

A decentralized exchange is an exchange market which does not rely on third party services to hold one’s funds or assets. Here, trades are peer-to-peer (P2P), they occur directly between users, and the whole process is automated. So far there are two ways to go about this. One way is to create proxy tokens (an asset that represents either fiat or crypto currency). Another way is to use a decentralized multi-signature escrow system.

This creates a “trustless” system, where one does not have to entrust their funds to a third party (such as a centralized exchange). When one makes a deposit of funds on a centralized exchange, they are essentially issued an IOU, which they can later trade back for assets. With a decentralized exchange, one is able to stay in control of their money, and therefore be safe from hacking attacks.

Another advantage is that there is no disclosure of personal details, one can make trades anonymously using decentralized exchanges. These models are fairly new, and have yet to adapt the functionalities of centralized exchanges which have been around for a long time. Users might find decentralized exchanges not so easy to use, and will not have access to features such as margin trading and stop loss.

Here are some already existing decentralized exchanges:

Waves Platform (www.wavesplatform.com) already has an in-built DEX (Decentralized Exchange), where one can trade BTC, ETH, USD, EUR and Waves.

Bitshares (https://bitshares.org/) is another crypto platform, which uses its own native currency BTS.

Kyber is an up and coming exchange which promises “seamless payments from any token”. You can check their roadmap and details here: https://kyber.network

0x (https://0xproject.com/) is another decentralized exchange which facilitates peer-to-peer exchanges of ERC20 tokens on the Ethereum blockchain. These trades are executed through Ethereum-based smart contracts.

Etherdelta (https://etherdelta.github.io/#PPT-ETH) is yet another Ethereum-based decentralized exchange.