Many top exchanges are centralized. Centralized exchanges facilitate trading and also manage several user aspects, like people’s private keys and their capital. This centralized model helps match people and institutions with each other. Centralized exchanges prot from their transactions fees, allowing companies to run ICOs through their exchange, charging coins to list, and creating their own cryptocurrencies. These factors make centralized exchanges very lucrative targets for hackers and phishing experts, because the exchanges maintain ownership of all of their users’ private keys. The industry experienced rst-hand just how vulnerable exchanges are with examples like Mt. Gox losing over 400 Million worth of BTC in 2014 and the recent replacement of the Ether Delta site by hackers who were able to steal a quarter million USD.
While some people like the ease of using an exchange that will take care of important features (like actually storing assets), a primary trade-off is asset security. Some of the leading exchanges have suffered from hacks that have seen millions of dollars’ worth of digital coins being siphoned off to thieves. As early as 2014 It was estimated by Business Insider that about one in sixteen Bitcoins had been stolen. A growing number of people who use centralized exchanges have run into all kinds of issues concerning fraud, hacking, and theft. These problems still exist even as centralized
exchanges focus on Know Your Client (KYC) regulations. These issues are a major problem for a number of reasons. Since the cryptocurrency community is so new, trust is everything. A reputation for theft and hacking is going to drive away outsiders who are interested in ‘getting into’
cryptocurrency. Institutional investors are also potentially deterred from investing if they do not have the condence that cryptocurrency exchanges are capable of keeping their assets secure. It is vitally important that the cryptocurrency world has a high degree of trust. Trust in systems, institutions, and exchanges will help the entire ecosystem grow.
One solution that has come about is decentralized exchanges (DEX). These types of exchanges run on a distributed ledger, in a similar fashion to many
virtual coins. This type of model keeps customer information and assets in people’s hands. This type of model has become very popular because it conceivably solves many of the issues that plague centralized exchanges