What is a centralised cryptocurrency exchange?

Centralised operations contain a core, central element through which everything must pass. Every day, you likely deal with many centralised institutions. 

A centralised cryptocurrency exchange controls your digital currency. Centralised organisations have become so common that we’ve become accustomed to them and probably find it hard to expect or imagine any other way. Our banking systems, governments, and nations as a whole are very centralised. However, what exactly does that mean? Is this a good thing? Or perhaps a glaring area for improvement?

Centralised cryptocurrency exchange

Whether or not you’ll be a fan of centralisation likely depends on your personal circumstances, what you value and where you stand within—or relative to—a centralised entity.  Thus far, we have become accustomed to many things being centralised.  You might not fully realise the effects on your life and everyday dealings.  Pretty much anywhere you deal with a third party, you’re experiencing some form of centralisation.

Third parties might represent market inefficiencies and security vulnerabilities, but they can also offer a less risky or more practical method of operation. Having a third entity involved in a transaction that could be handled equally as well—if not better—through a direct manner is usually unnecessary; it clogs things up and results in a more expensive experience for both the producer and the consumer. The middleman needs to get paid—and ultimately winds up cutting into profits or increasing costs. At the same time, however, a completely trusted middleman—in charge of handling money from point A to point B or providing safe asset storage—can make transactions easier and reduce consumer risk.

Regarding other forms of centralisation, a party that holds large amounts of meaningful data is a party with a great deal of control. Take traditional banks for example. Your account information—including your balance, transaction history and personal details—is all contained within an internal, centralised database. The tech giants of today (Facebook, Google, etc.) are most all heavily-centralised institutions which own massive pools of data. Your data. My data.  Everyone’s data. This is centralisation at its finest. And if you’re not careful, it could become a problem.

Centralised cryptocurrency exchange – potential problems

In a similar way, centralised cryptocurrency exchanges can present problems to investors. This type of exchange stores your funds in dedicated, unique cryptocurrency wallets, but it holds the private key(s). Essentially, the exchange has all the control over your digital assets and the reflection of these holdings as exchange balances. Centralised exchanges keep control in the hands of the exchange.

At their very core, cryptocurrencies and the blockchain were handmade for decentralisation, and that is probably the direction future exchanges will be heading. Nonetheless, centralised exchanges work to an extent; they can provide workable solutions that are simply good enough. One positive aspect of implementing centralised practices in cryptocurrency exchanges is that it’s what people are used to. Given a similar process of signing up for an online account, logging in to make transactions and seeing one’s balance stored on some app or website through on-platform operations, users of centralised exchanges are likely to find the process easier and quicker to adapt to.

The whole commotion surrounding private key storage and setting up different types of cryptocurrency wallets can be confusing, overwhelming and deter potential investors from entering the crypto space. We live in the age of passwords, and that’s what people are used to.  Using familiar processes is perhaps the easiest way for new exchanges to onboard customers.  Thankfully, new log-in methods extend beyond basic email/username and password combinations. Almost all secure exchanges now offer additional layers of account protection, such as email verification or Google Authenticator codes. The majority of cryptocurrency exchanges might still be centralised, but that is perfectly alright if nothing goes astray.

Some might say using a centralised cryptocurrency exchange leads to a more stressful experience. Centralised exchange hacks have happened, and people have lost all of their on-exchange investment funds overnight. However, having the ability to recover lost or forgotten passwords through an exchange can also save you a lot of despair. There is much more control in holding your own private keys, but simple storage on a centralised exchange is still the go-to method for many investors. As such, expect centralised ventures to continue popping up. To successful founders who can eliminate security concerns, these exchanges are money printing machines.

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