The Case for Custodial Exchanges. Image credit: AdobeStock
The Case for Custodial Exchanges. Image credit: AdobeStock
The idea is exciting. Instead of doing all their buying, selling, and trading with a multiple-user trading platform on the web, DEX users employ smart contracts to locate potential trading partners and conduct transactions on an ad hoc, one-on-one basis with no intermediaries.
DEXs seem like the natural next step in the transition to a user-centric decentralized global digital economy. Crypto is based upon the goal of giving everyone independence and reducing reliance on intermediaries, after all.
It may be that DEXs will prove to be an effective universal solution for crypto users someday. But for most crypto users, that day is far off. Today’s decentralized exchanges require advanced technical knowledge and lack features that are essential for most users.
Users of decentralized exchanges must jump through a considerable number of technical hoops. They must set up wallets for each currency they trade. They must choose methods of storing their public and private keys. They must install software. They must take responsibility for security. With a DEX, you must perform all the tasks that are taken care of for you at a traditional custodial crypto platform.
Moreover, you’ll find the instructions sparse and highly technical – if there are any instructions at all. If there are instructions, there’s no guarantee that they’ll be written in a language you understand. The teams behind DEXs generally lack the resources or long-term user commitment to translate information into users’ languages.
Don’t expect that you can refer questions to the help desk. The whole idea of a DEX is that every user is independent and self-sufficient. There is no support staff to answer questions or help you execute transactions.
DEXs are generally crypto-only. If you want to purchase crypto with euros, pounds, or krona, you’ll have to do that. And if you want to sell your crypto and withdraw conventional currency, you can’t do that either. You’ll have to transfer the funds elsewhere.
Most DEXs are created by anonymous teams. You know nothing about their background or qualifications – not even their names. Do the software routines they’ve written include code to siphon off some or all of your funds? Maybe. At a DEX, you’re responsible for assessing the reliability of the anonymous developers and, ideally, reviewing the source code yourself to ensure it doesn’t contain malicious code.
Even if the code is written with good intentions, it could be vulnerable to hackers. Most DEXs are created by individuals or small teams without the resources to do professional-level testing or employ military-grade security measures. In the past 12 months, users have lost billions of dollars to hackers who exploited weaknesses in DEX code. With a DEX, there’s no one to refund your losses if the code is compromised.
And with a DEX, there is no simplified access to high-end investment tools. Suppose you want to stake some of your crypto to earn a good return. Or you want to schedule recurring purchases to perform cost averaging as investment advisors recommend. What if you want to trigger buy or sell transactions when prices hit a certain level?
Some DEXs may offer these advanced features, but when it comes to using them, investors are on their own.
Experienced investors with in-depth knowledge of blockchain technology, public key encryption, wallets, and smart contracts can work around the limits of decentralized exchanges. Many thousands of people are using DEXs happily today.
That leaves about 7 billion people who aren’t using DEXs – people who don’t have computer-science degrees or the inclination to manage every aspect of their financial lives with their bare hands.
That’s what custodial exchanges are for.
Custodial crypto platforms like Kriptomat sidestep all the weaknesses of DEXs. At the best custodial crypto sites, you’ll find features like these:
Advanced security measures, including white-hat testing, bug bounties, cold storage of user funds, and enterprise-grade security systems. Some do even more: At Kriptomat, users log in with strong two-factor authentication and Kriptomat secures their data and funds with high-end security protocols. Kriptomat was the first European crypto platform to earn ISO 27001 certification for data security.
Ease of use. The Kriptomat platform includes an introductory encyclopeadia of cryptocurrency, blockchain technology, and investing – all written concisely in everyday language. Instructions are translated into the local language in every country where Kriptomat does business. Videos demonstrate how to conduct transactions and a highly responsive support staff is on call to answer questions.
Advanced trading tools like cost averaging, automated transactions, and price alerts are easy to use at the best custodial platforms. These are the same features exclusive financial advisors offer to their richest clients – for high fees. At Kriptomat, these features are available to all users.
At a custodial site, you know who you’re working with. Most sites list the names and brief biographies of the founders. Look for sites that are licensed and regulated where you live. That’s how you know you’re working with a reputable partner who believes in adhering to regulations governing financial services.
Using a DEX is like storing your life’s savings under your mattress. You’re in complete control, but it’s a far cry from the secure vaults you find at banks.
If you’ve been trading crypto since 2011, you’re experienced with setting up multiple kinds of electronic wallets, and you’re comfortable analyzing the source code of smart contracts, then a DEX may be for you. It gives you maximum control without involving intermediaries. You’re a step closer to the crypto dream.
For the world’s remaining 7 billion people, custodial platforms like Kriptomat aren’t a second choice – they’re actually a superior solution. The same sites that make buying and selling crypto as easy as ordering a pizza offer simple access to proven investing tools that are available only to big-money investors at conventional brokerages. You can set up automated purchases and sales to take advantage of price changes when you’re not online and recurring purchases to enjoy the advantages of cost averaging with funds you might otherwise spend thoughtlessly. Plus access to hundreds of carefully curated crypto coins and tokens.
Kriptomat is committed to a future in which the benefits of the cryptocurrency revolution are shared by everyone, no matter where they live, whether they are high rollers in the investment world or unbanked beginners whose only access to the financial world is a cell phone.
You can’t make that future real with today’s DEXs.