money laundering – Z24 Crypto

Evolution of Exchanges

Swap.Online delves into the background of centralized and decentralized cryptocurrency exchanges. As decentralization is our name for the game, we would primarily like to find out whether it was inevitable or not.

From Childhood to the Golden Age: DCEs and CEXs

The first centralized cryptocurrency exchanges had two main pre-historical roots of origin. Ideologically, they originated from the e-commerce exchange services of the early 2000s. Digital Currency Exchanges, or DCEs, were particularly popular in the U.S. and Australia. GoldAge Inc., E-Gold Inc., Liberty Reserve were frequently seen in the headlines mostly due to legal issues, as the U.S. SEC, as well as the Australian ASIC failed many times over to figure out whether the e-gold exchange was a form of banking, money laundering, non-licensed remittances or illegal entrepreneurship. These services exchanged fiat money on different digital currencies (1MDC, E-Gold, eCache etc.) and, in a way, fulfilled the demand of New World and EU citizens for anonymous transactions of digital and fiat money.
But, in fact, the first significant cryptocurrency exchange arose from a surprising source… The website of the online game “Magic: The Gathering Online”. This game’s name refers to a magical world, where the currency system is represented in the form of cards. Jed McCaleb, the programmer from San Francisco and future contributor for Ripple and Stellar, developed the Mt.Gox project with the purpose of trading these cards like traditional stocks. In January 2007, he purchased the domain name mtgox.com, but in 2008, he abandoned the project as a premature venture. One year later, he used this domain to advertise his own online game. In the year of 2010, he read about the concept of Bitcoin and decided to launch the Mt.Gox exchange and exchange rate service allowing to trade Bitcoin freely. The project was released on July 18, 2010.
Rapid commercial growth started when the product was sold to the French-Japanese developer Mark Karpeles in January 2011. It was the year 2011 when Mt.Gox demonstrated the main security challenges that traditional centralized exchanges will encounter all along their development path in the future. These included direct thefts from the platform’s wallets, attacks with multiple ‘ask’ orders, malefactor invasions resulting in price drops (one day, in the spring of 2011, 1 BTC was worth less than 0.01 USD) etc. By the way, the dramatic collapse of February 2014, with more than 750K BTC lost and the $65M civil suit in Tokyo court were still to come. During the years 2012–2013, every 3 of 4 Bitcoins in the world was sold via Mt.Gox, and it was a real success story.
The years 2011–2012 gave birth to the bulk of top centralized cryptocurrency exchanges. BTCC was founded in June 2011 as the first exchange for the Chinese market. At the same time, American developer Jesse Powell had spent a month visiting Mt.Gox offices to offer assistance in the aftermath of the first hack. He was unsatisfied with the level of business organization, and that was how Kraken was founded in July 2011. The infamous BTC-e platform for exchanging rubles for BTC was also launched in July 2011. In late 2011, the largest American exchange BitInstant was founded and started selling Bitcoin via WalMart and Walgreen. 2012 became the year of origin for Bitfinex, Coinbase (first Ethereum marketplace) and LocalBitcoins.

Pros and Cons of Centralized Exchanges

We are now six or seven years away of those days. Today, hundreds of centralized exchanges are offering the services of exchanging BTC, ERC-20 and another cryptos. We can even hardly classify them. Usually, specialists speak about three mainstream types of centralized exchanges.
Trading platforms. They connect buyers and sellers to each other, allowing them to publish trading orders and take some transactional fees (most commonly 0,3 per cent from the taker of the liquidity). For example, Cex.io, BitFinex, BitStamp belong to this group. Usually, these platforms are characterized by a complicated interface, which is not suitable for newbies.
Cryptocurrency brokers. If a trading platform is a local market where you buy goods from their producers, the broker is a small player on the market. They sell coins at definite prices while setting high fees, but allow acquiring cryptos in a simpler manner. Moreover, most of them support a broad range of payment tools. Coinbase, Coinmama, Coinhouse are among the most popular brokers.
Peer-to-peer-services. They simply allow their users to publish announcements about operations with cryptos. The buyer and the seller directly negotiate the prices. It is even possible to find one selling crypto for cash in your neighborhood. The most remarkable example here is LocalBitcoins.
As one can see, now the range of services offered is truly broad. By the way, there is a list of common complaints regarding centralized exchanges both from traders and crypto theoreticians.
Safety. Even a single point of centralization can lead to the massive theft of users’ funds and keys. More than a million BTCs have been stolen by the time of writing of this article.
Regulation. If the center (or even one of the centers) of a CEX is physically located in some country, the position of this country’s government on ICOs and crypto related issues becomes crucial for the future of the project. Legal restrictions in this sector are now imposed in the U.S., China, South Korea, India etc. When your exchange is centralized, the officials can arrest your cryptos for no reason. Moreover, the administration of the exchange can be involved in fraud with your private information and money.
Speed. We have conducted some particular research on the speed of popular CEXs (Binance, Huobi, Poloniex, see p. 11). The results are sad: you can wait dozens of minutes waiting for the pending of your transaction.
KYC/AML. There is nothing to talk about in this regard, we suppose. If you must send someone your photo, a scanned copy of your ID or even proof of income wanting nothing in return but to withdraw your own funds, it is not OK.

Decentralization: The Solution

Decentralization, as the initial meaning and internal essence of blockchain, smart-contracts and cryptocurrencies, was first italicized by Satoshi Nakamoto and even Nick Szabo in 1990–2000-s. The rise of CEXs resulted in an obvious contradiction, because blockchain-based currencies are being operated via centralized mechanisms just like Visa or MasterCard, but much slowly. Is it normal? Where is the next stage of evolution or, does it even exist in the first place?
The answer was the main point of arguments in the crypto community during the year of 2017. In February, Vitalik came out with the suggestion about the nature of blockchain’s decentralization: “Blockchains are politically decentralized (no one controls them) and architecturally decentralized (no infrastructural central point of failure), but they are logically centralized (there is one commonly agreed state and the system behaves like a single computer)”.
The only possible expression in the commercial implementation of ‘architectural decentralization’ is the decentralized exchange of cryptocurrencies.
And the most advanced technology in this case is that of the Atomic Swaps — the direct peer-to-peer instant cross-chain transaction.
CEXs were the natural and inevitable stage of development for cryptocurrency exchanges. By the way, the DEXs are coming: we found them (namely IDEX, EtherDelta and Waves DEX) on the list of the top-100 exchanges on Coinmarketcap.
So, the Swap.Online team is on the right track. Get ready for ERC-20 ⇔ BTC, ETH ⇔ BTC, USDT ⇔ BTC, EOS ⇔ BTC trading directly from your browser with neither middlemen nor a centralized infrastructure.
See you on the mainnet on August 27, 2018,
Swap.Online Team
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