Cryptocurrency stocks continue to make noise around the world where the total market capitalization of cryptocurrencies continue to increase to now over $4 billion. The cryptocurrency world has taken some major hits over the years in regards to some major hacks. These incidents have seen cryptocurrency exchanges, such as Japan’s Coincheck, lose more than $500 million worth of digital coins after a series of hacks.
What is the answer to the vulnerable, more centralized cryptocurrency exchange?
Coincheck is not the only centralized cryptocurrency exchange to get hit by these hacks which has created a rise in investor and holder concerns. With evolving perceptions of the vulnerability of the current centralized cryptocurrency exchange systems, it creates a shake up in the market.
The answer is decentralized cryptocurrency exchanges.
Decentralized cryptocurrency exchanges puts the control back into the hands of the users when it comes to their own funds and their own wallets.
Centralized exchanges handle the trading of cryptocurrencies for their users and use third party services to hold the user’s funds. This old centralized exchange system is highly vulnerable to attacks due to these key factors. Decentralized exchanges are organized such that the trades are peer-to-peer with the users rather than with a middleman, which greatly reduces this huge vulnerability of getting hacked.
The use of a more decentralized cryptocurrency exchange removes the “middleman.”
There are already quite a few players in this decentralized world. Bitcoin Magazine talks about the likes of Bisq, EtherDelta, AirSwap, and Hodl Hodl. This has given cryptocurrency traders a variety of options with which to control their assets, involving little interaction with other parties. The users of a decentralized exchange keep their own private keys and transact directly with one another rather than entrusting a centralized system with all of their precious information. Hacks have been way too common in the last several years, with credit card and personal information companies like Target, Home Depot, Sears, and, of course, Equifax more recently. Why entrust your most precious assets if even some of the biggest companies in the world are getting hacked?
Blockchain and peer-to-peer cryptocurrency transactions do not hold user assets.
Since these decentralized users do not hold any user assets, it reduces the probability of users’ information ever getting hacked. Blockchain technology allows for the peer-to-peer transactions to take place, eliminating the middleman and third party systems. Companies like AirSwap, specifically, use Ethereum blockchains and atomic swaps which are based upon smart contracts, making sure assets cannot be traded without the user receiving another asset. Stepping away from the big bank system of centralized exchanges where everyone’s data is held there waiting to be hacked, decentralized exchanges places the control with the user through much more secure methods of transactions.
Decentralized cryptocurrency exchange methods are venturing into fiat currency transactions.
While most decentralized exchanges only work with the peer-to-peer cryptocurrency trading, Bisq is one of the few who also allows the buying and selling of bitcoins in exchange for national fiat currencies. These bitcoin exchanges can also take place for other cryptocurrencies. This is only the beginning as it still relies partially on the centralized banks and government of a nation from which the cryptocurrency is being traded in returns for the fiat currency. Even companies such as Visa are having a hard time justifying a cryptocurrency-to-fiat related transactions. They shut down their debit card system which hosted Bitcoin-based debit cards on their network.
Bisq is helping to break through these barriers in the form of orchestrating trading outside of the cryptocurrency application. The process of a buyer and seller are set into motion to work together on settling fiat payments outside of the application via other person-to-person systems such as Zelle in the United States or SEPA in Europe.
Since decentralized cryptocurrency exchanges never allow user hands over private keys to vulnerable third party systems, they cannot be lost or stolen by those third parties.
Other versions of these more secure means of trading include Hodl Hodl’s owner peer-to-peer cryptocurrency exchange. Hodl Hodl does not hold any user funds, but, instead the funds are locked down in multisig escrow. Every time a peer-to-peer cryptocurrency exchange occurs, a multisig escrow cryptocurrency address is created.
The seller sends their cryptocurrency from their wallet to the exchange account which then locks down the cryptocurrency in escrow. The buyer then sends the seller fiat currency. The seller sends the locked cryptocurrency from escrow to the buyer’s wallet. This simple, yet, secure transaction allows the users to stay in control of their funds and their security making decentralized exchanges a highly lucrative way of trading.
(To learn more about cryptocurrency transaction security, read How Blockchain Works to Rebuild Trust Between Strangers.)