[FOCUS] Centralized vs Decentralized Exchange? Too poor to compare
[FOCUS] Centralized vs Decentralized Exchange? Too poor to compare
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  • 승인 2018.04.30 17:00
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Cryptocurrency exchanges have been through a lot lately. CEO Kim Ik-hwan of Coinnest was arrested on charges of embezzlement and several other exchanges were asked to make improvements to their security measures and transaction transparency. Bitcoin and Ethereum prices plummeted since the beginning of the year with no sign of recovery. Cryptocurrency value is dropping and exchanges are losing credit. Finally, peer-to-peer decentralized exchanges (DEX) are quickly emerging as an alternative to Bithumb and other centralized exchanges.

 

DEX platforms are expected to create greater competition among different types of cryptocurrency exchange platforms. Built on a blockchain platform, is it not controlled by a central party and therefore provides enhanced security and privacy. In Korea, Glosfer and others blockchain companies are working on developing DEX platforms.
 
The question we must ask is what DEX can offer that centralized exchanges cannot. If DEX succeeds, centralized exchanges will have no choice but to improve their internal technology. If DEX fails, it will end up as just another ‘annoying’ distribution platform that does not do much.
 
To gain first-hand experience of the DEX platform, I decided to trade on SingularX, a DEX platform developed by entertainment company SingularDTV. After creating a private key on MyEtherWallet, I linked it to Metamask and logged into SingularX. Then I transferred my Ethereum from Bithumb to MyEtherWallet. The transfer took less than one hour, which was faster than I had expected.
 
My overall impression of SingularX was that the website needed better management. When I tried to log in to SingularX with my private key, a pop-up message informed me that it was a duplicate account. I was denied access several times and had to wait until the next day to log in successfully. The Korean language version had errors as well. When I clicked on the account tab in the Korean version, the subcategories did not properly display.
 

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The greatest problem occurred, however, after depositing Ethereum from MyEtherWallet to the exchange account. 
As per the instructions on the website, I selected a seller from the order book and attempted to buy but failed over ten times. 

The website did not explain why the transaction was unsuccessful. After trying for a few days, I gave up on trading on SingularX.


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Moreover, when I tried to withdraw funds from the exchange to MyEtherWallet to trade on a different DEX, I failed again. Interestingly, I never ran into any problem when I deposited money onto the exchange. The exchange’s website did not list any phone number so the only way to contact the exchange was via email. It also has an unusual policy on fees—the transaction speed increases with a higher fee but the exchange does not provide any explanation on how exactly the speed is impacted by the fee.

 

When I inquired via email after the withdrawal, a staff member replied that “SingularX is still in the process of developing the withdrawal feature. When the development is complete, users will be able to transfer funds out of SingularX directly.”

In other words, SingularX can receive money but does not provide a convenient way to withdraw funds from it. As of now, the only way to withdraw money from SingularX is by transferring it to a wallet like MyEtherWallet. On my last attempt to withdraw from SingularX, I reduced the fee to a fourth to save money and six hours later the transaction was still pending. That’s enough time for a roundtrip to Busan.

 

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Decentralized exchanges are emerging in earnest in 2018 and are expected to increase in number quickly. All transactions are handled on the blockchain system to prevent hacking. All transactions are peer-to-peer through smart contract without an intermediary. Assets are managed directly by the investors and the role of the exchange is reduced to a mere facilitator.

 

Some of the well-known decentralized platforms include Kyber Network, Etherdelta, CoinCola and Huobi as well as decentralized projects promoted by large centralized exchanges such as Binance. Meanwhile, Korean companies are still in the process of developing DEX prototypes.

 

There are 15 to 20 decentralized exchange projects in Korea that are currently under development and four to five of them are already live on the Ethereum network. Decentralized exchanges are not in the limelight yet because they are Ethereum-based and only allow the trading of ERC20 tokens. As such, the trade volume is low and the interface is still under development. In February, P2P exchange Coing opened in Korea but did not attract enough users and in March Goodbit was introduced but closed down within days.

 

After trading on a decentralized exchange, it only seemed fair to trade on a centralized exchange this time. After depositing money into my Bithumb account, I bought 50,000 won in Ethereum. The price did not fluctuate much, so I sold when the Ether price rose by 3,000 won. Because I traded such a small amount, I ended up with a meager profit of 60 won. And after subtracting the fee of 75 won, I came out losing money.

 

When a security breach occurs at an exchange, investors suffer the most. This is because exchanges are classified as telecommunications service providers and therefore are not responsible for providing damage compensation. Most cryptocurrency exchanges do not include investor protection in their terms of service. The Fair Trade Commission made its first recommendation for corrective action on the fourth of this month and its recommendation on cryptocurrency exchange regulations is not going to be released until the local elections are over in June. Basically, cryptocurrency exchanges are not under proper regulations as of now.

 

A centralized cryptocurrency exchange generates hundreds of millions of won to billions of won in daily revenue. In 2017, Korean cryptocurrency exchanges garnered 700 billion won in fees, which is an 85 times increase from the year before. Upbit, Bithumb, Korbit and Coinone generated revenues of 194.3 billion won, 317.7 billion won, 67 billion won and 78.1 billion won, respectively. All kinds of coins are issued in hopes of being listed on an exchange to make a profit. Since exchanges charge a fixed fee for listing regardless of the value of the coin, they list as many coins as possible.

 

There is considerable doubt as to whether part of the profit goes toward improving the safety measures of these exchanges. It seems unlikely. There have been numerous cryptocurrency exchange hackings since 2011. Last year, Korean cryptocurrency exchanges lost 500 million dollars (approx. 500 billion won) due to data breaches. Bithumb lost billions of won while Youbit went bankrupt after losing 22.5 billion won. Japan also suffered a loss of 105 billion yen due to hacks against Coincheck and Mt. Gox.

 

In addition, domestic cryptocurrency exchanges are suspected of manipulating market prices. In December 2017, investors on Bithumb suffered a great loss because servers went down due to the high demand for Bitcoin Cash, EOS listing and other events. Online cryptocurrency communities often accuse Bithumb of blaming the ‘traffic overload on the website’ whenever users suspect that Bithumb is blocking sales below a certain price or manipulating the price and quantity of a coin sale.

 

Bithumb and other major exchanges still include “The exchange is not responsible for any losses or damages incurred to the delivery of cryptocurrency by a system or service defect” as a valid clause on their terms of service. A prosecutor revealed that there is “circumstantial evidence that a few exchanges other than Coinnest have been conducting transactions in less than transparent ways” and estimated the amount of embezzlement to be tens of billions of won for each exchange.

 

At this point, it seems silly to argue that centralized or decentralized exchange is better than the other. Both are focused on advertising their strengths to attract more customers without a clear presentation of their vision and long-term goal. They seem to care more about making money through charging fees.

 

Unless these exchanges remedy their shortcomings, investors will continue to suffer. “The exchanges’ standard agreement and ethics-related terms are quite lenient. They need to work on operating their businesses in a transparent manner. We have a long way ahead,” said Korea Blockchain Association’s self-regulation committee member and information protection committee chairman Kim Yong-dae. 

 

He added that “It is too early in the game to rely on the system of these centralized or decentralized exchanges.” According to Kim, “Investors need to make smart decisions by investing in safe projects according to the audit results by the self-regulation committee.”



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