Since bitcoin was created in 2008 and another cryptocurrency was born, many people began to trade cryptocurrency. Market cap and trading volumes are steadily rising and more people are trading cryptocurrency online.

Through the so-called exchange, you can buy and sell different cryptocurrencies in either ordinary currencies or other cryptocurrencies. The cryptocurrency exchange plays an important role in the cryptocurrency ecosystem by enabling it to purchase cryptocurrencies in the currency like US Dollars.

However, most cryptocurrency exchanges, such as Binance, OKEx, and Bitfinex which we commonly call exchange, are centralized exchanges. Transactions are made on a centralized database of exchange servers, not on a blockchain basis. Because of this, many problems have been raised.

The problem of a centralized cryptographic exchange

The most common problem is security vulnerability. Blockchain technology, which is the basis of cryptocurrency, uses decentralized distributed data storage technology, so it is safe from cyber attacks such as hacking. However, the cryptocurrency exchange itself does not use blockchain technology and is therefore vulnerable. Many exchanges, such as Mt. Gox, Poloniex, Bithumb, and Coinrail have already been hacked by attackers. The victims did not get proper compensation from the exchange. Most transactions are stored on their own servers and are vulnerable to hacking attacks.

There is also a problem with stability. If a lot of users are involved in the exchange server, the processing time of the sale or withdrawal will be delayed, and the server itself may be down, which may cause damage to investors. It took several days to deposit and withdraw from the Bithumb exchange, and Bittrex was freezing or slow responding to the pricing indicators at all.

This centralized exchange has problems such as hacking, delays in transactions, and obstacles that require investors to use the exchange at a high level of risk. Demand for decentralized exchanges is increasing as confidence in existing exchanges declines.

The emergence of decentralized cryptocurrency exchange

The decentralized exchange does not use its own central server to hold your funds. You do not have to trust a third party because it allows you to make direct transactions with users through automated processes and is done with smart contract.

There are already many decentralized exchanges such as EtherDelta, 0x, Bancor, etc., and Binance and Bithumb are also preparing to launch a decentralized cryptographic exchange.

Decentralized exchange seems to be much better because there is no risk of hacking, but there are problems too.

There is a lack of volume and liquidity. This is because exchanges are not well known and the amount of transactions is low. This is not only a decentralized exchange but also a centralized exchange.

There is also a problem with the speed of trading. Because it uses smart contract, the amount of transactions that can be processed per unit time is less than the centralized exchange. That means it takes longer to trade. This raises the question of whether we can respond to changing prices every minute or every second. This is a structural limitation of the blockchain technology. Therefore, people are trying to find a solution through various attempts such as generating a transaction only when a transaction is confirmed.

It is also one of the side effects of the pre-sale of the minors who are aiming for the market profit due to delays in trading. Everyone can see all the transactions, so they see the tokens that the price will go up with the mass purchase, and then they get a profit on the market by putting a sale transaction.

In addition to this problem, since the transaction between the cryptocurrency and the real currency is made, the intervention of the central institution such as the bank is indispensable, so the introduction of the decentralization exchange is premature.

Both centralized and decentralized exchanges have advantages and disadvantages, and a hybrid exchange that takes advantage of these advantages is emerging as a new alternative. It is a model that implements P2P blockchain transaction as order system of decentralization exchange while speeding up transaction by using transaction method of centralized exchange.

Conclusion

With the development of blockchain technology and the introduction of new technology cryptocurrency, a cryptocurrency exchange that plays an important role in the ecosystem is also developing. Although a decentralized exchange has emerged due to the problems of centralized exchanges, there are many inconveniences to use and some problems to solve. In addition, the government will have to regulate the cryptocurrency market. Centralized exchanges that meet regulatory requirements and are highly efficient are likely to lead the market for a while. However, the essence of the blockchain platform is in decentralization. With the new technology flow, I thinks that decentralization of the exchange will accelerate.

Currently, the 'decentralized exchange' market is still in its infant stage, and there are not many transactions. This includes the desire to allow market participants to securely trade cryptocurrency without using a platform operated by a specific institution. Could such a wish come true? The cryptocurrency exchange also seems to be in the experimental stage, like several cryptocurrencies. I wonder if the experiment will flow in any direction and whether it will bring abundance to our lives.