By Alan Curtis, CEO of Radar Relay
Cryptocurrency exchanges are a fundamental part of the blockchain experience. Yet, despite being labeled as a decentralized alternative to traditional commerce, most cryptocurrency exchanges aren’t actually decentralized. In fact, some of the most prominent cryptocurrency exchanges function by placing trust in centralized entities to facilitate transactions between buyers and sellers. For years, this has been a flawed, but necessary, process that has left once viable platforms in a vulnerable position.
Recently, cryptocurrency exchange hacks have become more commonplace. In fact, since 2011, there have been a total of 57 cryptocurrency hacks around the world, bringing total losses to a staggering $1.63 billion USD, according to analysis by Autonomous Research. This past year, Coincheck lost $535 million USD, Bitgrail lost $170 million USD, Coinrail lost $40 million USD, and Bithumb lost $30 million USD — just to name a few. Certainly, the nearly 200 centralized exchanges currently in operation have learned an important lesson from this experience. However, the velocity of hacks doesn’t seem to be decreasing, and many industry experts are begging the question: Why?
As mainstream interest continues to flood the space, centralized cryptocurrency exchanges are fast becoming ripe targets for large-scale hacking events, and many lack the internal infrastructure necessary to adequately defend themselves against growing operational risk. In searching for a substantive solution, industry experts have begun to rally behind the creation of a new type of cryptocurrency exchange — one that not only facilitates non-custodial asset transfers, but also institutes unprecedented security in the process.
This was the justification behind the creation of decentralized exchanges: a new marketplace designed to remove many of the centralized variables surrounding cryptocurrency transactions. Instead of relying on a centralized entity to facilitate crypto interactions, decentralized exchanges simply serve as a forum to connect buyers and sellers — providing a means to which exchanges can occur, but not a service. In fact, decentralized exchanges never actually take custody of a user’s cryptocurrency, minimizing the possibility that assets can be hacked en route to their destination.
For the modern cryptocurrency community, providing these assurances offers substantial decreases in the likelihood of one’s sensitive information falling into the wrong hands. Imagine you’re a prospective cryptocurrency user, and you’ve just signed up to a centralized exchange. Upon creating an account, not only would you be asked to input your digital wallet, but also your name, date of birth, proof of address, and, in some cases, your social security number. If a large-scale hacking event were to occur, all of this information could be compromised, and your entire identity at risk.
By contrast, decentralized exchanges only require your cryptocurrency wallet at the time of the transfer — no excessive information, no transfer of custody. Users of decentralized exchanges are also encouraged to hold their assets in cold wallets, or wallets separated from the network, in an effort to prevent hackers from having unrestricted access to account balances. Only once a buyer or seller has been established, and a transaction is about to occur, would cryptocurrency be transferred.
At Radar Relay , we’ve made it our mission to onboard the world to the token economy, focusing less on creating a centralized entity or platform, and more on creating a process that brings peers together. We recognized early on that there was a need in the crypto community to close the lengthy feedback loop between buyers and sellers, and we’ve created an experience that not only reinforces, but streamlines once burdensome transaction processes. Now, with thousands of users across 150 countries worldwide, we are confident in our ability to use relayers to encourage mainstream participation in the space.
Where do we go from here? While decentralized exchanges certainly present notable improvements to their centralized counterparts, there is a synergistic relationship between the two. For the time being, centralized exchanges will continue to leverage mainstream banking relationships, handling the “on-ramp” or “off-ramp” movement of fiat to cryptocurrencies and vice versa. Meanwhile, decentralized exchanges and relayers will continue to act as crypto super highways where buyers and sellers can move cryptocurrency safely and efficiently. The resulting ecosystem will create a menu of options that provides a well-rounded experience for users, encouraging industry growth for years to come.