Cryptocurrency exchanges are notorious for their fragility.
They are targets of constant scrutiny and animosity from all sectors. They have directly or indirectly caused traders to lose billions of dollars. Hackers have broken into exchanges — like the iconic Mt. Gox — ever since they first appeared. They are pregnant honey pots of unguarded financial data, easily spotted by nefarious actors, and readily broken into.
Until they achieve more stalwart security, centralized exchanges will be perpetual targets. Ironically, they will likely always be insecure as a result of being centralized, unless they pay big to protect their servers.
Of course, the crypto community senses the irony. They know Satoshi Nakamoto’s modus operandi was to provide people with a way to avoid the middleman. This was Satoshi’s enduring ideal or vision. It’s ultimately to undermine trusted third parties and free the user from giving random individuals unlimited access to his data.
The centralized exchanges merely brought people back to the old paradigm. Users must entrust the exchange with their private keys and expect the exchange to protect them. For many people in the crypto space, this idea is antiquated and backwards. It’s on par with getting back into the legacy financial system and entrusting a centralized entity, like a bank, to protect personal assets.
Thinking about Hybridization
In sync with the Satoshi’s vision, solutions to the problems of centralization have already begun to multiply. In order to solve the problems of security, as well as problems of trust, visionaries in the space started talking about decentralized exchanges. They wondered if it was possible to create an exchange without a central point of failure; without an architecture of vulnerability. So developers begin experimenting with these types of platforms. The BISQ network was one such protocol, among others like the Kyber Network.
But these decentralized protocols had their own downsides. The technology was too slow and cumbersome. Where the centralized platforms may have possessed weak security, they excelled at having good latency, liquidity, speed, and scalability. The centralized platforms could grow with their user base, allow for high-frequency trading, and make certain they evolved alongside user adoption.
To the contrary, the decentralized exchanges required traders to use the platform simultaneously to make an exchange — such as on the Bisq network — which was a sticky wicket. They could also not readily scale or meet the speed requirements of modern crypto trading. This led developers to think another way about the problem: what if they combined the best of both worlds, the best of centralized (CEX) and decentralized (DEX) platforms?
What if they merged solutions and created hybridized exchanges or “HEX’s”?
Perks of the Hybrid Model
Without a doubt, the HEX model of cryptocurrency exchanges seemed like the perfect solution. Hybrid exchanges represent a way to protect trader money and provide speed and scalability. On the hybridized platform, a user will eventually be able to maintain their private keys, yet also continue to trade a light speed. Hybrid exchanges are still in an embryonic state, though. They are not quite functional, and their usability remains to be seen. Nonetheless, the fact that users will eventually be able to maintain their private keys means the platforms will be more antifragile, while also lending credence to Satoshi’s ideal. Currently, like traditional exchanges, keys will be stored on cold wallets until the next version of the platform emerges.
To ensure this ideal and maintain “trustlessness,” a hybrid exchange called Qurrex promises to provide users with auditing features. According to a Decenter article, “They promise that the exchange will provide its users with all the necessary information, namely, quarterly reports, results of audits conducted by one of the top 4 global auditing companies, and reports on the operation of the system from an independent commission.”
Community Driven Crypto Exchange
Hybrid platform CoinCasso directly allows users to keep their private keys. Their website says, “The CoinCasso platform features high safety because we do not hold client funds in their own accounts and they are not exposed. It should be noticed that exchanges in the top 50 possess this approach.”
The CEO of CoinCasso, Luke Ozimski, also noted that through the hybrid model approach, they are able to share their profits with the community.
“The goal of the company is to create a community with which we will share up to 80% of our profits. Since the inception of CoinCasso in May 2018, we organize and appear at events, explain to the public how the CoinCasso exchange operates building a network of contacts and followers. Before the end of sales, the owners of tokens will be able to participate in the development of the project by making decisions that affect the operation of the platform, and for this they receive bonuses.”
This ability to share profits with the community is not a typical component of centralized exchanges. Therefore, it also contributes to Satoshi’s vision of creating not only trustless platforms but empowering the communities that drive those platforms.
The Decenter article explained the ultimate goal of these hybrid programs, “Hybrid exchanges should be the golden mean that will unite the advantages of a centralized exchange, such as cooperation with large investors and the trust of many users with the advantages of a decentralized exchange, such as reliable storage and the absence of subordination to a higher authority.”
Salvaging Satoshi’s Ideal
The hybrid cryptocurrency exchange indeed appears poised to take a dominant position in the community. Certainly, hybrid models still suffer from weaknesses. They are imperfect. Some of the most hardcore crypto lovers decry hybridized exchanges because they store user data and abide by government regulations. They still apply “KYC” and “AML” to their customers. This means in theory governments can go after people due to this centralized database of user information.
Even with this downside, hybrid exchanges marry the best of two worlds; decentralized and centralized. They allow people to protect their assets while they trade at light speed. No longer does a trader have to wake up in the morning to realize millions of their dollars have evaporated. They can also conduct peer-to-peer transactions without being impeded on by anyone outside the scope of that trade.
This is an amazing turn of events, and I believe it represents the beginning of salvaging Satoshi’s ideal. Centralized exchanges have made cryptocurrency look like nothing but a pirate’s cove of stolen loot. This has led people to erroneously believe everything in crypto is a scam. Therefore, until the technical problems with DEX’s become resolved, hybrid exchanges appear to be on the cusp of revolutionizing crypto trading and further legitimizing the cryptocurrency industry. Now people can have their cake and eat it to: they can use a crypto exchange while not having to rely on those wily and evil, “trusted third parties.” A new crypto era is emerging.