In the past we have been confronted many times with people loosing their investments on centralized exchanges due to theft, scams, bankruptcy, you name it. A few of these cases are highlighted below and show the nasty experiences that investors have had to deal with in the past couple of years.
- Bitomat which was later acquired by MT GOX had lost it's Wallet.dat file in 2011, resulting in 17.000 missing Bitcoins (BTC).
- Bitcoinica which closed down after 2 security incidents in 2012, over 43.000 coins were stolen in one of the incidents.
- Coinex claimed to have experienced a hack in 2013, loosing all of the investors' coins and was later concluded to be a scam.
- MT Gox, by far the biggest and the most well known, suspended trading in 2014, brought down it's website and halted all exchange services after 850.000 BTC were reported stolen. It soon thereafter filed for bankruptcy.
- Bitfinex was hacked and relieved of 120.000 BTC in 2016
- BTC-e was closed by the FBI in 2017 on suspicion of money laundering (including that of the theft of MT Gox) and other financial crimes.
There are numerous more cases to list here, but the moral of the story should be clear: Centralized exchanges are not safe. As Andreas Antonopoulos, author of 'Mastering Bitcoin' once wrote:
"The lesson here is that if you don't control the keys, you don't control the bitcoin. Possession is nine-tenths of the law, and in bitcoin, possession of the keys is ten-tenths of the law. If you don't control the keys anymore, it's not your bitcoin! That lesson will be learned as many times as it needs to."
His message, dated from 2014 has been repeated on countless occasions including on social media like Reddit, Bitcointalk and indeed Steemit, but still we continue to flock to the centralized exchanges. And the reason for that is simple. Liquidity.
First off, investors want to be able to get out of their assets at any given moment in time and until recent years, the only efficient options to do so were centralized exchanges. Exchanges which require you to deposit your assets first before being able to trade with them.
Second, investors want to be able to trade their assets of choice with a minimal spread (difference between bid and ask). Third, the thickness of the order book and the trade volume over a given period are even more important to ensure the demand or supply doesn't dry up after the initial trades.
Until recently and arguably still, centralized exchanges are the only ones to satisfy quick access and liquidity demands.
However, decentralized exchanges have been popping up in recent years. These are especially popular for the fact that they are safer as you are not storing your assets with a 3rd party.
Good examples are Waves DEX, Bitshares, BISQ. There are quite a few others, including newer ones, but none of them have been able to penetrate the top 10 exchanges in terms of 24 hour volume, which are all above $50 mln by the way.
A new ICO is coming up though (not much of a surprise) of a token that enables a protocol that allows people to create decentralized exchanges on top of the this token (possibly more surprising). It is called the 0X Project and in the whitepaper it is described as follows:
" It is intended to serve as a basic building block that may be combined with other protocols to drive increasingly sophisticated dApps [4]. 0x uses a publicly accessible system of smart contracts that can act as shared infrastructure
for a variety of dApps"
In essence the point here is that relayers (entities that host and maintain an order book) working on the 0X protocol could create a liquidity pool that could be shared and reinforced by other dapps using the same protocol. The decentralized exchanges would thus use each others liquidity to uplift their own liquidity. So the competition of other exchanges, who are using the same protocol, would create more liquidity in general without having to switch between exchanges.
Currently liquidity remains a prerogative for centralized exchanges only. However there may be a time in the near future that it wouldn't have to be a trade-off anymore and safety and liquidity would go hand in hand...
Wouldn't that be great?
References:
https://bravenewcoin.com/news/36-bitcoin-exchanges-that-are-no-longer-with-us/
https://www.cryptocoincharts.info/markets/info
Images:
https://microcapclub.com/2012/07/will-raising-bid-ask-spreads-increase-microcap-liquidity/
https://www.worldcoinindex.com/