Despite several bouts of high volatility, the total market cap for all cryptocurrencies has stayed over the billion-dollar threshold for some time.
Undoubtedly, part of this is because, from the beginning of 2014, there has been a tremendously steady influx of cryptocurrency users. However, as cryptocurrency use continues to grow, exchanges will be increasingly pressured to shore up their operations.
The ongoing problems with cryptocurrency exchanges have been well documented. Cyber attacks and security breaches are common, sometimes resulting in a complete shutdown of the exchange. Sometimes, crypto exchanges will simply stop working without any forewarning to traders and investors. One of the biggest problems crypto exchanges face is liquidity — often times it is hard to exit a position at the right price. This is due to outdated technology and the lack of ability to move fluidly between cryptocurrencies and their fiat counterparts.
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How Crypto Exchanges Can Be Made More Secure:
Create Decentralized Exchanges
Believe it or not, some of the top cryptocurrency exchanges are centralized — a word that is anathema in hardcore blockchain circles. Exchanges like Bittrex, Bitfinex, and Kraken are all centralized, meaning that they run off of centralized infrastructures and use local servers. Unfortunately, this means that they all have singular points of failure and central vulnerabilities that are prone to attack. All hackers need to do is find the central point of failure, exploit it, and run off with whatever treasures they can get their hands on.
But centralization doesn’t just benefit cyber criminals. Governments in places like South Korea, China, and the United States are all eager to slam the lid shut on cryptocurrency trading, as cryptocurrencies serve as an alternative to central bank issued fiat currencies. China, in particular, has been at the forefront of cracking down on centralized exchanges and recently announced that the clampdown on centralized exchanges will be escalated.
In November 2017, the U.S. Internal Revenue Service (IRS) ordered Coinbase to disclose the account details of over 14,000 customers for trades made between 2013 and 2015. By order of the U.S. court system, Coinbase must turn over names, addresses, taxpayer identification numbers, and dates of birth to the IRS, or risk federal consequences. Ironically, centralized exchanges can’t keep their users from operating in a truly decentralized manner.
The easy solution is to create decentralized cryptocurrency exchanges. These exchanges are not controlled by a centralized entity, nor is the infrastructure built on centralized servers. They are much harder for cyber attackers to breach, and central governments have no point of contact to prosecute or shut down. OpenLedger is just one of many decentralized exchanges that have opened up in the last several years. Other examples include Bisq, Stellar, and CryptoBridge.
How Crypto Exchanges Can Deal with Operational Issues
In addition to ongoing security threats, crypto exchanges have historically had issues with reliability, especially when trading volume dramatically increases. In December 2017, Coinbase trading was halted for roughly two hours due to network traffic that was unsustainable. Drastic price fluctuations and large volumes of traders running for the exits caused a temporary halt in buy and sell orders, leaving many investors fuming.
Use Special Blockchain Infrastructure
Some companies have deployed blockchain powered exchanges that are able to scale to meet increased transaction volumes. One company, BitShares, uses Graphene, a piece of blockchain technology that is capable of processing 100,000 transactions per second (TPS), assuming all of the right conditions are in place. With TPS numbers this high, cryptocurrency exchanges will have no problems handling today’s trading volumes. The Waves platform, which is similar to Bitshares in several respects, provides multi-currency wallets so clients can invest in cryptocurrencies. The platform allows companies to issue their own blockchain tokens powered by the Waves blockchain.
Use Integrated Wallet Systems
Another option is to implement software that scans the crypto universe for the best possible trades and makes exchanges based upon prices. Companies like Changelly are creating platforms that allow users to quickly transfer digital assets between crypto wallets. So, if a user wants to exchange Litecoins for Bitcoins, the platform will scour crypto exchanges looking for the best exchange rate. Once it is found, the coins are swapped, a small fee is taken, and the desired coin is deposited to the user’s wallet proportionate to the original amount. Another company, ShapeShift, allows users to swap between assets without requiring them to set up an account. It doesn’t require users to store their money at a centralized exchange, and it cuts down dramatically on transaction costs.
A relatively new solution involves the creation of one-stop-shop trading platforms like that of Beaxy. These platforms have several unique features, including the ability to quickly convert fiat currencies to all major cryptocurrencies. The platforms will also support instant deposits of fiat currencies, which can make a world of difference in a volatile, rapidly moving environment. Thus when users want to cash out of their crypto positions or initiate the purchase of cryptocurrencies, the process is completed immediately rather than waiting several days for payments to clear and fund requests to be approved.
In addition, the trading systems utilize a platform native coin that can be used to purchase a wide array of portfolio management tools. Users can have access to real-time data, graphs, and price alerts. This will give all crypto investors the ability to become informed, highly-skilled traders and investors. What’s more, users won’t have to worry about price delays, because the software will provide live updates and 24/7 support.
Another trading platform, Coinigy, has several features including account monitoring, high-definition charting, and access to the world’s best exchanges. It is completely encrypted and never requires users to store their assets with the exchange, so they always have control of their cryptocurrency holdings.
Despite some large obstacles, the outlook for cryptocurrency exchanges is still very positive. Though there will always be the threat of cyber-attacks, government regulation, and operational inefficiency, emerging blockchain technology can be used to increase security, streamline operations, and make trading easier for users.
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