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ETH · 27w

The Paradox of the Crypto Scene — Can we patch things up?

There has undoubtedly been a huge hype around blockchain and its potential for universal decentralization in the past.

Not only the intrinsic value of the blockchain was noticed, much more there was a boost of the extrinsic value of the tokens: The price people where suddenly willing to pay for the digital goods shoot up dramatically. And this rapid increase in demand brought new investors to the scene.

The whole excitement around blockchain also became the excitement of investing and trading — and that’s good.

But being the only real option for investors, digital currencies were exclusively traded on centralized platforms for a long period of time.

Why is this such a problem?

Leaving all funds in control of the exchange poses a single point of failure and this puts all the users’ assets at risk.

The cryptocurrency thefts on MtGox, Shapeshift and Bitfinex resulted in the loss of the funds of millions of users, showcasing the genuineness of the problem and proving that the concept of centralized exchanges is fundamentally flawed.

Alongside the hackability of these exchanges, centralization leads to two further major issues:

Even though users can, in theory, decide to withdraw their capital at any time, they have no influence on when their assets get transferred. This sometimes results in weeks of waiting time: The users essentially have no real control over their funds. Since most centralized exchanges are unregulated, they can run on fractional reserve. Also, they can flood their platform with non-backed tokens to manipulate prices: The exchange can do whatever it wants.

So, despite their huge popularity, centralized exchanges faced significant trust issues from their very beginning — and rightly so.

But how come no one bothers? Out of sight, out of mind.

Centralized exchanges have become more and more accessible, offering fancy features and turning trading fool-proof, making the usage of their pl...

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