Hybrids have always urged us to relook and revisit the classical notions of many aspects. It’s not new that hybrid cars bring the advantages of the availability of fossil fuels and the environmental effectiveness of electricity. Hybrids have always strived to bring the best of both worlds, and Cryptocurrency Exchanges have not been spared from this transformation.
The Relevance of Hybrid Exchanges:
Binance, one of the leading names in cryptocurrency exchanges has launched its decentralized cryptocurrency exchange alongside a public blockchain. They have vehemently claimed that decentralized exchanges will co-exist with centralized exchanges in the near future. Also, they have predicted that hybrid exchanges will soon replace wholly centralized exchanges - hybrid exchanges will retain the traditional values of centralized exchanges, but at the same time, will also bring in the benefits of a decentralized exchange!
The Advantages & Disadvantages With Centralized Exchanges (CEX)
Centralized exchanges are the global standards these days! They allow quick processing of orders - translating into direct low latency. They also bring in the benefits of liquidity, high-frequency, and marginal trading tools. In addition to all of these, there stands the resistance to change. The classically inclined mainstream investors have always been used to the centralized exchange ecosystem which essentially involves third parties and intermediaries, and the costs associated as well.
Centralized exchanges, however, do not always paint a rosy picture!
Centralized exchanges exert undue influence over the market. They decide the currencies that can be listed and that cannot be. The centralized exchanges, especially the ones involving cryptocurrency have to depend on blind trust that the funds stay safe in the exchange. There is also a possibility of fund-manipulation and intervention from the Governments (that might not be aware of cryptocurrencies and advantages) - like how it happened in September 2017 in China. There have been instances of loss of funds through malicious activities like hacking. Exchanges like Mt. Gox, Bitstamp and Coincheck stand as dubious examples of such hacks resulting in losses worth over millions.
While the above-said points are inherent disadvantages, there are also advantages induced by malicious human intentions - like front-running and hacking. There have been instances of loss of funds through malicious activities like hacking. Exchanges like Mt. Gox, Bitstamp and Coincheck stand as dubious examples of such hacks resulting in losses worth over millions. Front running refers to the process of an exchange inserting its own orders before any external orders. This is done in anticipation of big-price moments. While in highly regulated markets, these behaviors are illegal and policed strictly, this might not be possible in unregulated areas like blockchain.
The Advantages & Disadvantages of Decentralized Exchanges (DEX)
Decentralized exchanges can considerably reduce the risk of front-running. Since there is no centralized order book-keeping or ledger that is controlled by a single entity, the security of the orders cannot be breached. Decentralized exchanges also allow users to maintain control and custody of their funds.
Decentralized exchanges make it difficult to collect information from the DEX users because of constraints on privacy and the push for anonymity. The absence of a centralized ledger acts as a deterrent for DEXs in offering efficient latency. This ‘deterrence’ translates into fewer investors participating in the market, and this results in lower liquidity. Any investor would, as much as security, also prefer liquidity of the funds.
The Hybrid Advantage:
The advantages and disadvantages of the CEXs and DEXs have given a tough choice. However, the practical solution would be to have the advantages of both, and none of the disadvantages - which is precisely what hybrid exchanges bring. They offer the functionality, transparency, liquidity, and high-latency of a CEX, and also the security of a DEX.
The growing acceptance of cryptocurrencies is converging towards the point of cryptocurrencies being wholly regulated. Regulatory compliance points like AML and KYC procedures will make hybrid exchanges more appealing and acceptable. This will avoid incidents similar to the seizing of crypto assets and freezing of funds because of the lack of diligence in regulatory compliances.
Partnering with established exchanges compliant with regulatory frameworks gives the fillip needed to boost liquidity. With over 200000 users, Paymium - Europe’s first regulated Bitcoin marketplace - stands as a good example of how such a partnership can work wonders. The atomic swap integration that takes care to make a decentralized and secure settlement along a centralized order book. The low latency of centralization joins hands with the secure cross-chain settlement of decentralization.
Blockchain App Factory’s Hybrid Cryptocurrency Exchange
Blockchain App Factory already has the required expertise in creating cryptocurrency exchanges. As a company that is committed to upgrading and updating itself, we also offer White label Cryptocurrency Exchange Software Solutions. The regulatory compliances and the essential technologies will not have any lapses in perfection. Feel free to get in touch with our team, and we will take care of the rest to get your hybrid cryptocurrency exchange up and running!