DEX Series #3 - Governance and Control Distribution of Exchanges

DEX Series #3 - Governance and Control Distribution of Exchanges

In the first two posts of the 0xcert DEX Series, we were discussing identities in crypto assets and 2 ways of trading with them. The third post in a row explores governance and its impediments in crypto asset exchanges.

Governance is becoming an essential part of trading with crypto assets. Decentralized exchanges have important inherent advantages, which should reduce the need for implementing internal rules and agreement conditions.

For Blockchain but Centrally Governed

As of today, there are over 2.000 crypto assets in circulation and traded on cryptomarkets, and their number is increasing on a monthly basis. Judging from multiple reports, among the initial most active participants on cryptocurrency exchanges were also black market vendors and other enterprising criminal entities with immense appetites.

The vast majority of attacked or hacked exchanges are of a centralized structure, which - given the idea of blockchain as a distributed technology - is a glaring irony. Centralized governance of these exchanges, although providing regulatory bodies and countries with an illusion of control, were also victims of various unfavorable consequences that undermine the core principles of the blockchain.

Regulated Approach in Centralized Exchanges

Governance and regulations of exchanges differ from one regulatory area to another. Many countries have started imposing government regulations, mainly bringing established banking practices of KYC (Know Your Customer) and AML (Anti-Money Laundering) to the world of crypto exchanges. These mechanisms intent to serve as a primary preventive measure from potential hacks and hidden identity, and as one of the initial steps towards the security of (primarily) trading platforms and their users.

A varying degree of governance and operational limitation has led to some cryptocurrency exchanges being available only in specific countries. The regulatory mechanism, however, has not fully eliminated risk on the user side. When a trader uses centralized exchange platforms and makes deposits to fuel transactions, these funds are stored and owned by the platforms, albeit appearing in user’s account. Everything from order books to actual custody of value is in the hands of the centralized platform.

No Middleman, Just Users in Control

One of the ways towards eliminating the inconvenience of asset governance being in the hands of a centralized platform or marketplace is moving towards decentralized and trustless exchanges. Reliability and infrastructural stability of an automated platform are facilitating trust, not what the T&C or the platform manager stipulates. The middleman becomes utterly redundant, as there is no need to rely on a third party to manage platform and execute transactions.

Compared to centralized exchanges like Bitstamp, traders on decentralized exchanges like IDEX have their assets stored in their private wallets off the exchange and conduct transactions through them. Assets are controlled by users themselves and nobody else, which is one of the principal advantages of decentralized exchanges.

Power to the People

Although blockchain-powered decentralized exchanges can be either controlled by no one (fully decentralized control) or partially controlled by the exchange creators (use is decentralized but ownership is partially centralized), they provide reduced proclivity to censorship, harder-to-execute security violations, and generally less frequent technical malfunctions. Along with ease of use, these features bring decentralized trading platforms closer to the hands of people and provide an equally distributed control.

Trading and interactions without a middlemen will gain an increasing importance. Luckily, the SwapMarket exchange is providing just that.

For more on the topic of a decentralized way of trading assets, please check our other episodes of the DEX Series:

DEX Series #1: Tags and IDs
DEX Series #2: Trading and exchange
DEX Series #4: Centralized vs. decentralized exchange
DEX Series #5: Academia
DEX Series #6: Crypto-collectibles