The ‘decentralized exchange’ is an emergent idea, and the impacts such a facility could have on the cryptocurrency market are significant.
The entire cryptocurrency sphere preaches decentralization. It is decentralization that is a defining factor of cryptocurrency and blockchain technology in general. Outside of major known use cases, there are examples of massive corporations removing a ‘single point failure’ in their closed systems, to governments providing validation on issued university degrees. The blockchain is changing how we build critical systems.
Yet the exchanges we use to trade cryptocurrency all operate using systems built on previous share trading platforms. Closed software sites open to breaches or DDOS attacks during critical times in the market, while at the same time charging us, the users and traders, with fees for using this soon to be antiquated technology. It’s with a strange sense of irony that crypto traders love decentralization, then are required to use centralized trading platforms. But a decentralized exchange is a complex beast. It is going to take time to build. Yet it would provide a level of freedom and security for its users that has never been seen before in this community.
Centralization is a dividing subject in the cryptocurrency community. Tokens like Ripple (XRP) have integrated centralization into the technical structure of the token itself to much negative noise from the purists who claim that cryptocurrency must be decentralized as a core characteristic. A decentralized exchange would satisfy a significant base of the cryptocurrency community. The base that preach decentralization is required in a coin/token. Yet those that are comfortable with centralization in crypto – the board members of a token such as XRP, for example – may argue that centralized exchanges are important in solidifying legitimacy in cryptocurrency.
There is an element of truth to this, no doubt. With an increase in some regulation (certifications for exchanges), perhaps privacy protections or even a level of monetary protection from government can follow (which has not occurred yet, but exists in the stock market in several western countries). Yet the handful of hypothetical positives from centralized, regulated exchanges are vastly overshadowed by the positives of a decentralized exchange.
First and foremost, a decentralized exchange is borderless. In places with less freedoms, users need only have an internet connection and possibly Tor. This would increase the quantity of traders, and as such increase the demand, and therefore overall value. Second, the dreaded ‘exit scam’ or exchange failure, or hack would be eliminated. There wouldn’t be a controlling body and therefore no controlling exchange wallets. This is why cryptocurrency is what it is today. Each trade would be peer to peer. This may increase trade times, but the signs are all positive on the Lightning network – and these technological advances will continue to hurl forward. Third, a DDOS attack to paralyze the system would become moot – the system would be without a single point to attack.
Forth, and a point deserving of its own paragraph, there would be no national or international government influence. This has massive implications which could change the direction of the entire global regulatory focus on cryptocurrency.
Impact on Government
First, most governments have implemented some form of ‘Know Your Customer’ (KYC) laws or regulations which are strictly imposed on exchanges that wish to operate (in general) or deal in cryptocurrency (more specifically). Essentially, KYC regulations set out a checklist that exchanges must satisfy in order to provide a platform to a new customer. Anti-Money Laundering (AML) laws fit within this realm – attacking the privacy of users. To say these regulations are onerous is an understatement – but almost all cryptocurrency traders are aware of this already. We all had to provide level upon level of identification to our exchanges of choice in order to purchase cryptocurrency. It’s a threshold that can most certainly satisfy that we are who we say we are. A decentralized exchange would eliminate this factor entirely. It would eliminate trading delays during signup and processing due to KYC and AML red tape.
Second, governments have served exchanges with asset seizures historically, which have paralyzed traders who keep significant quantities of cryptocurrency within the market. This may cause significant damage to these traders, and overall harms the cryptocurrency community as trust in the current system may prevent new users (and thus adoption). A decentralized exchange would eliminate the risk of asset seizure entirely.
And finally, all governments are moving towards imposing strict regulation on the exchanges within their jurisdiction in order to commence serious retrospective audits of cryptocurrency traders. Tax is the topic of 2018, and regulation is the facilitator. But a decentralized exchange would pivot the community in such a manner as to side step the trajectory of the regulator’s missile. This miss would lead regulators back to the drawing board. It would set them back, quite literally, years. A decentralized exchange would be the market’s answer to the government’s current drive for exchange driven reporting to target users.
It’s an interesting thought exercise. But so was Satoshi’s original decentralized currency paper. If decentralized exchanges become a viable reality, the war through regulation will become even more complex for law makers: their current strategy is to target exchanges operating under their jurisdiction. The exit point of cryptocurrency to a user: if that exchange has extensive information on both the identity and the transaction history on that user, it becomes the clear and easy regulatory point.
For example, the SEC recently issued a directive on "potentially unlawful online platforms for trading digital assets", putting an even greater regulatory strain on US-based cryptocurrency exchanges. A decentralized exchange would be entirely immune to such regulatory directives, regardless of the influence of the issuer. In a decentralized exchange, a user is an IP address. A username. A faint trail of wallet transactions which can easily be muddied or ‘tumbled’, as the kids say. An IP address is essentially meaningless these days, as it leads to a VPN server somewhere and the company renting the server is operating in Panama making a job out of ignoring law enforcement requests.
If this works – this seemingly logical but legally crazy step for cryptocurrency exchanges of the future - the market will be even freer. We would be operating in actual cypher-punk territory. Currency and tokens assigned a value by us – the market – for us – the market. Government has purpose, but there is no room for corruption. We’ve had enough and the projects of our future are made with this mantra in mind. The concept of an established decentralized exchange is one which would take the cryptocurrency market to a new height. Yet technically and logistically this all remains to be seen.
Featured image from Shutterstock
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Con’s a writer. His education background is law, where he’s published in law journals on the legal issues of crypto-currency. His opinion editorials tend to focus the relationship between people and technology, as well as the societal challenges technology can present. He’s consulted for non-profit privacy and digital rights groups, aiding governmental submissions. His passion is for information security, technology and the intertwining legal issues.