Today, the most common way to trade cryptocurrencies is by using centralized exchanges. These types of exchanges are popular because of their user-friendly interfaces, fiat to crypto trading services, functionality, liquidity and low fees.
Centralized exchanges operate in a similar way to banks. They are essentially third-party middlemen that hold all their customers’ digital assets and facilitate clearing of all trades internally. With no transparency, this keeps everything behind the scenes. Even if the centralized exchange does not act in bad faith, their entire network is still set up as a virtual honeypot for hackers. Finding and exploiting just a single weakness in the system could potentially allow hackers to steal millions of dollars worth of cryptocurrencies. In fact, more than 30 exchange hacks have taken place over the last 9 years, with billions of dollars’ worth of assets being stolen. It is clear that the underlying infrastructure of centralized exchanges is flawed. As cryptocurrency trading becomes more popular, these incidents will continue to occur.
So what is the solution?
Enter DAEX: A Decentralized Digital Asset Clearing and Settlement Ecosystem for centralized exchanges. Imagine each trade as being made up of three parts: matching, clearing and settlement. First, a buyer is matched with a seller. The trade is then “cleared”, this is when both accounts are updated and all the necessary arrangements are made for the transfer of assets. Finally, the trade is settled and the assets are exchanged. The DAEX solution divides clearing and settlement into separate entities using distributed ledger technology and smart contracts.
Trades are cleared on the clearing chain, which is a public open source chain also known as the DAEX blockchain. On a centralized exchange partnered with DAEX, trades are still matched by the exchange, although clearing and settlement of the transactions are served by DAEX in a transparent and open way. Traders can access their assets via the DAEX wallet across multiple exchanges in the ecosystem using a multi-segment private key, allowing them to keep full ownership and control of these assets in a secure environment.
Traders can experience the benefits of centralized exchanges, whilst not having to worry about the security of their assets. Meanwhile, exchanges are able to receive a competitive edge in the market and focus on their core competencies. This is because they are no longer required to provide clearing and settlement services or an internal system to store their customers’ assets. This ultimately creates a more convenient, secure and open trading environment for all participants.
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