Where is the line between decentralization and exchange decentralization? Which one is the trend?

❖Centralized Exchange❖

The reason for the closure of Fcoin is that the trading platform cannot be restored. If the platform can be restored quickly, it is estimated that Fcoin can continue to operate. Why? It is very simple. Users speculate on coins in Fcoin, which is just a change in the account book. User A uses 1000 USDT to buy 0.1 BTC. In user A's account book, 0.1 BTC is increased and 1000 USDT is reduced. Another user B sold 1 ETH for 280 USDT. His account book increased by 280 USDT and reduced by 1 ETH.

Whether it is user A or user B, since they recharged their coins to the centralized exchange, they have lost their coins and obtained an account book and the data on the account book in the centralized exchange.

Under this premise, there are two opportunities for centralized exchanges to do evil. Note that it is an opportunity to do evil, not that centralized exchanges will definitely do so.

➤2 evil spaces

1. Misappropriation of funds

After users deposit funds into centralized exchanges, they still retain ownership of the funds, but lose actual control over the funds. The exchange can embezzle the user's funds.

Some friends may ask, what should I do when I want to withdraw money? It’s very simple. Centralized exchanges can give you the funds recharged by other users. Therefore, as long as not many users withdraw money at the same time, centralized exchanges can generally handle it.

The reason why Fcoin went bankrupt was that its trading system was damaged and could not operate normally. Many users came to withdraw their coins, resulting in Fcoin's inability to redeem.

In fact, commercial banks also operate in this way. Users deposit funds, the bank keeps a portion of it as a security deposit, and then lends out the rest of the funds to earn interest.

The problem is, we know what the centralized exchanges do with the funds after they embezzle them. Is it a stable investment or a high-risk investment? Therefore, there are many variables when our funds are in centralized exchanges.

2. Transaction fraud, price manipulation, false orders, and K-line modification

Since our coins and transactions are in centralized exchanges, only changes in ledgers and accounts occur.

Therefore, centralized exchanges can forge transactions and manipulate currency prices.

If the current price of BTC/USDT is 10250, the centralized exchange can directly add two users to the ledger, and then they will make large transactions at the price of 10250, thus artificially increasing the transaction volume of the centralized exchange.

According to a survey report by Tokeninsight last year, "According to the report, 36% of exchanges (11 exchanges) have a real trading volume ratio of more than 80%; nearly 50% of exchanges (14 exchanges) have a real trading volume ratio of less than half. It is worth noting that more than 25% (8 exchanges) have a real trading volume ratio of less than 20% of their reported trading volume."

Many centralized exchanges are suspected of falsifying data. Moreover, the Tokeninsight report is an analysis of transaction data from September 3 to 21, 2019. Among the 11 exchanges with a high proportion of real transactions, the performance of other periods cannot be guaranteed.

Data falsification can be considered as a face-saving behavior of the exchange, but price manipulation may not be the case.

TVB used to use an exchange called BiZhang. Before it ran away last year, it was seen that the exchange had a large number of BTC sell orders, with very high prices and large amounts of BTC. On the surface, this exchange is still very rich and has a lot of BTC. However, in fact, the exchange does not need to have coins at all, it only needs to add a few data to the account.

For some coins with a large number of users, price manipulation is not easy, but for some small coins with a small number of users, centralized exchanges can manipulate prices. Centralized exchanges can directly make data and make many high-priced orders, so that they can complete the price manipulation.

For example, a user places an order to sell a certain coin at a price of 5. The exchange can place several fake orders at 4.8. When the user cancels the order at 54, the exchange immediately cancels the order at 4.8 and changes it to 4.7. When the user wants to accept the order at 4.7, he will find that the buy order at 4.7 has disappeared. TVB has really experienced such a thing.

Even orders that have been placed at a certain price may be deleted by centralized exchanges, and the trading volume can be modified at an appropriate price, and ultimately the K-line can be modified.

➤ 1 risk

One of the biggest risks of centralized exchanges is credit risk.

Because centralized exchanges misappropriate user funds, we have no idea what they will do with the funds, how much margin will be available for users to withdraw, and whether centralized exchanges will be unable to continue operating due to operational problems.

Fcoin is unable to continue operating because its trading system cannot be restored.

Fcoin is unable to pay its users due to its unfavorable operations or other reasons.

Users may lose money when trading cryptocurrencies, but unless they use leverage, they will not lose everything.

However, after the credit risk of the centralized exchange breaks out, users’ principal cannot be recovered.

Although Fcoin promises to allow users to withdraw cash, the short-term period is 2-3 months and the long-term period is 1-3 years.

During this time, the user's funds have a time cost, and any financial management will bring benefits. Moreover, even if it is not a bull market now, it is about to arrive, and the user's currency will most likely appreciate through transactions.

Therefore, the credit risks that centralized exchanges bring to users are: first, moral risk, coins cannot be withdrawn even if they have them; second, ability risk, coins can be withdrawn even if there is no profit.

❖Decentralized Exchange❖

Decentralized exchanges are different. In decentralized exchanges, the funds that users recharge are in their own wallets, which are on the chain. Users not only have ownership of the currency, but also have execution rights and usage rights.

In centralized exchanges, there is no actual transfer of funds when users trade, only account records. However, in decentralized exchanges, every transaction involves the transfer of funds. If user A exchanges 10,000 USDT for 1 BTC from user B, user A’s wallet will have 1 BTC added and 10,000 USDT subtracted, and vice versa.

Therefore, in a decentralized exchange, no one can embezzle users’ funds.

Therefore, in decentralized exchanges, if you want to falsify data or manipulate prices... you can, but you have to trade with real money and pay a handling fee.

And that credit risk does not exist. Decentralized exchanges only match transactions and never take possession of user funds, so there is no credit risk.

In contrast, decentralized exchanges have a higher threshold for malicious behavior and almost no credit risk.

❖Chu River and Han River Border❖

Whether an exchange is decentralized or not depends on where the user's deposited funds are. The funds deposited by the user are in their own on-chain wallet, with a corresponding address or account and a corresponding private key. This is a decentralized exchange.

On the contrary, the coins recharged by users are not in their own wallets, but are recharged into a wallet without a private key. This is a centralized exchange.

❖Exchange Trends❖

At this point, some friends may ask: Since decentralized exchanges have low credit risk and low threshold for committing evil, the trend must be decentralized exchanges.

However, what TVB wants to say is that for the time being, centralized exchanges are still the trend.

There are two reasons:

One is experience, the other is cost.

➤Experience the difference

The experience of centralized exchanges is indeed better than that of decentralized exchanges.

First, what is a private key? For some friends who are not familiar with blockchain, private keys are a bit troublesome and hard to remember. And they don’t know what a private key is. Sometimes when using a decentralized exchange, there is a password and a private key, which is too confusing.

Second, slow response. Decentralized exchanges are indeed slightly slower than centralized exchanges in executing transactions because they have to be put on the chain when executing transactions. But we know that the price of coins changes in an instant.

Third, product experience. TVB doesn’t understand why. From a technical point of view, the exchange interface and operation process are not affected by decentralization. However, the product experience of decentralized exchanges is generally inferior to that of centralized exchanges. Among the decentralized exchanges that TVB has used, newdex is a good experience. A bitshares node has developed a gdex exchange APP, which has a decent experience. The interface of the bitshares official website is really unbearable.

➤ Cost Difference

Because every transaction in a decentralized exchange requires transfer, blockchain resources are needed. For decentralized exchanges on Ethereum, gas needs to be paid; for decentralized exchanges on EOS, CPUs, bandwidth, and memory are required...

Some people may say that centralized exchanges also use network resources when executing transactions, which also has corresponding fees. This is correct. However, centralized exchanges only have one centralized server, while decentralized exchanges have multiple servers running, so the cost must be higher than centralized exchanges.

Poor experience and high costs result in the trading volume of decentralized exchanges being far less than that of centralized exchanges.

❖Centralized Exchange Trends❖

➤ Exchange landscape

The cryptocurrency world has experienced the ICO bubble in 2017. We will find that there are not as many altcoins around us as before, and there are also fewer Ponzi schemes.

The same is true for exchanges. The landscape of centralized exchanges will also develop into one dominated by large exchanges.

Especially after the Fcoin crash, many users are afraid to use small exchanges anymore. Therefore, the amount of funds and trading volume of small exchanges will decrease. Large exchanges, on the other hand, have much less risk.

So some small exchanges will leave the market, and the ones left are large and medium-sized exchanges, as well as some decentralized exchanges.

➤Regulation of exchanges

The revelation that Fcoin gives us is that centralized exchanges are terrible. If centralized exchanges are not well managed, they will go bankrupt, and as a result, users' assets cannot be redeemed.

Some friends may want to report the case and recover their funds through legal means.

Let’s not talk about whether the public security department will take care of this matter, not to mention that cryptocurrency speculation is not allowed.

Fcoin's Zhang Jian needs to have enough funds to pay users. What if Zhang Jian has no money? What should he do? Even if he slowly pays back the money during his lifetime as Zhang Jian said, users may still suffer losses after paying back the money. This is because the coins of users may increase in value during this period through speculation or other investments.

That is to say, the problems arising from centralized exchanges are now handled after the fact, which cannot protect the rights and interests of users.

On the other hand, decentralized exchanges may not be able to support large-scale transactions due to performance and cost constraints.

Therefore, regulating centralized exchanges is a trend.

After the supervision, the exchange became compliant and was very happy.

After supervision, user assets are safe and users are happy

After regulation, first, the government can collect taxes on exchanges and have fiscal revenue; second, social problems will be reduced with good regulation; third, after regulating centralized exchanges, there will be compliant exchanges, which can compete with decentralized exchanges, which are relatively difficult to regulate. In the end, the government is also happy.

Therefore, regulating centralized exchanges is the trend.

First, the establishment of a regulatory agency must set a threshold. It is not something that can be opened by anyone. It requires certain management capabilities and financial foundation.

Second, fund supervision. One is the funds topped up by users. These wallets must be supervised by government departments, and centralized exchanges cannot misappropriate funds; or centralized exchanges must submit margin to the government based on transaction volume, so that if there is any accident, the government can use this money to compensate users.

Third, pay taxes. Exchanges must pay taxes to operate, no need to elaborate.

Fourth, the supervision of coin listing. Coin listing needs to be supervised, and you can’t just issue a coin and list it.

The above four are probably certain. The latter ones are TVB’s personal ideas and may be difficult to implement.

Fifth, the code of the trading platform must be audited. The code of the exchange must be audited. The program must be safe, and you cannot say that it crashes while using it. And it must be audited regularly.

Sixth, business supervision. That is, if you open leverage business or wealth management business in the exchange, it must be supervised and you can only do so after the regulatory department agrees.

❖Written at the end❖

Put the coins in your wallet and go to a large exchange. There is no need to say more about this.

TVB believes that centralized exchanges are still the trend, and centralized exchanges under supervision are the trend. It is hoped that government departments can speed up exploration and research to come up with a framework and regulations for regulating exchanges.

The Chicago Mercantile Exchange (CME) launched Bitcoin futures in 2017. Tim McCourt, managing director of CME Group, said that CME's Bitcoin futures trading volume has reached 100 billion US dollars in total.

TVB believes that centralized exchanges + regulation will first appear in Europe and the United States, with the United States having a higher chance of that happening. Other countries will then follow suit.

Yesterday, some friends said that the risk of platform coins lies in regulation. TVB believes that this risk does not exist: First, exchanges can be registered in some island countries, and other developed countries do not block IP addresses. Second, if centralized exchanges are banned, decentralized exchanges will have room for development. The most rational approach is to regulate centralized exchanges. Third, as a place of business, exchanges must pay taxes, which can increase fiscal revenue. And if they are well regulated, I think they will not bring great harm to society.

So from now on, the risks of large centralized exchanges and their platform coins are still not great.