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Understanding Hybrid Decentralized Exchanges

July 23, 2018

For the first time in human history, it is now possible for anybody with internet access to own and transfer assets anywhere in the world without trusting a third party to facilitate the transaction. That’s thanks to blockchain technology.

Even with this incredible innovation, however, building the infrastructure to make it widely usable takes time.

Bitcoin went live less than one decade ago. To maintain a good perspective, keep in mind that the internet existed for multiple decades before the Googles and Amazons and Alibabas emerged as dominant, internet-based businesses. Building infrastructure and gaining adoption takes time.

When we look ahead to the future of blockchain, crypto exchanges are unquestionably one of the most important pieces of infrastructure that need to be developed and improved. Specifically, exchanges need to become easier for the typical person to use and, even more importantly, they need to become more trustless and secure.

After all, what’s the point of building trustless, secure, permissionless, peer-to-peer financial networks if the only easy way to enter and participate in those networks is through an insecure, permissioned, and intermediated crypto exchange?

That’s why we believe that all of the safest and best cryptocurrency exchanges of the future will be decentralized. For now, though, most DEXes aren’t actually fully decentralized. Rather, they are hybrid decentralized exchanges, gradually inching their way closer towards full decentralization as the technology develops.

Existing Crypto Exchanges

In a perfect world, we could have decentralized networks that are just as cost and time efficient as centralized ones but more secure and censorship resistant. Of course, the reality isn’t that perfect. Decentralization is achievable, but it comes at a cost.

Most decentralized exchanges today struggle to support large trade volume for listed assets. For one thing, maintaining on-chain order books is extremely costly for market makers. On top of that, it also leads to heavy consumption of network bandwidth and unnecessary blockchain bloating.

As a result, many DEXes are actually better classified as hybrid decentralized exchanges, meaning that they have some characteristics of both centralized exchanges and decentralized exchanges.

There are numerous tradeoffs to consider when comparing centralized vs. decentralized exchanges.

Centralized exchanges are essentially intermediary services that oversee and control user funds while also keeping records of their personal information and transaction histories. The benefit of this system architecture is in its speed and low cost, while the downside is that it creates a central point of failure which can be exploited by hackers.

Some centralized exchanges have better security than others, but ultimately all of them are vulnerable to attacks. Considering that you do not own your private keys when you store crypto on a centralized exchange, this is a recipe for financial disaster.

Moreover, exchanges that have fiat onramps (e.g. Coinbase, Gemeni, Kraken) are all centralized. Therefore, the vast majority of new entrants into the crypto market must go through centralized exchanges first, and they often do so without a proper understanding of how to keep their crypto safe.

Decentralized exchanges, on the other hand, do not provide an intermediary service. Rather, they use smart contracts and other payment mechanisms to facilitate peer-to-peer (P2P) trading between exchange users. They are typically more transparent, fair, and secure than their centralized counterparts. That said, most DEXes today have clunkier user interfaces, less trade volume, and lower liquidity.

If cryptocurrency is going to achieve considerable mainstream adoption, top cryptocurrency exchanges of both varieties will need to improve on these pain points, and soon.

COOPEX - A Hybrid Cryptocurrency Exchange

After recognizing the problems that currently plague both types of crypto exchanges, we made the decision to build COOPEX as a hybrid decentralized exchange. Our aim was to ensure that COOPEX is secure and won’t lose user funds to hacks, while at the same time providing an easy-to-use platform that appeals to both novice and experienced crypto traders.

You might be wondering what exactly is meant by a ‘hybrid decentralized exchange’. Let’s break it down piece by piece.

Decentralized Governance

As the world’s first cooperative cryptocurrency exchange, COOPEX empowers users to voice their opinions through a decentralized governance system. This means that COOP token holders can vote on important decisions such as which coins to list on the exchange for trading and other important exchange policies.

We can only live up to our name, The Cooperative Exchange, if we have a positive relationship with our traders. Decentralized governance - along with a commitment to customer service and a best-in-class token buyback and dividends program - will help make COOPEX one of the most trader-friendly exchanges in the entire crypto space.

Decentralized Asset Exchanging for Smart Contract Compatible Cryptocurrencies

One of the top priorities for our development team is to decentralize the Ethereum and ERC20 token portion of the exchange prior to launching. Since Ethereum has native smart contract capabilities, this won’t be too challenging to do and will make all of the Ethereum-based assets listed on the exchange extremely secure.

We will use the COOP token as a base asset and to pay for Gas (transaction fees). This, combined with our policy of free listing for ERC20 tokens, will help establish COOPEX a top exchange platform for Ethereum and Ethereum tokens.

Centralized Management of Bitcoin and Bitcoin Cash

Unlike Ethereum and ERC20 tokens, Bitcoin and Bitcoin Cash do not support smart contracts. Unfortunately, this makes it more challenging from a programming standpoint to make the management and exchange of these assets decentralized.

As we want to begin serving traders as quickly as possible, we will initially launch the exchange as a hybrid decentralized exchange with Bitcoin and Bitcoin Cash still having centralized management. However, this is only a temporary measure. We are committed to transitioning into a fully decentralized exchange in the future.

Trader-Friendly Crypto Exchange

One of the biggest problems with decentralized exchanges is that they are often very difficult to use. In order to appeal to traders of all different experience levels, COOPEX focused heavily on providing a superior user experience.

One of the ways we accomplish this is by not charging deposit fees, while keeping withdrawal fees as low as possible by only charging the amount necessary to cover the network processing fee. Most exchanges prioritize profit above the experience of their users and charge unnecessarily high deposit and withdrawal fees, and we saw that as an opportunity to out-compete those exchanges.

As for trading fees themselves, maker fees will be just 0.20% on COOPEX, while taker fees will be 0.25%. More importantly, 75% of these fees will be used to buy back COOP tokens and burn them, continuously decreasing the token supply and creating upward price pressure. For reference, this buyback rate is more than 3x higher than that employed by Binance.

Looking Ahead

We look forward to making COOPEX a fully decentralized exchange in the future, with users owning their private keys for all listed coins regardless of their smart contract compatibility.

At the conclusion of our ICO, we will launch COOPEX as a hybrid decentralized exchange that prioritizes the experience of traders above profit. As we work to become 100% decentralized, we will remain committed to the core blockchain ethos of security, transparency, and fairness.


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posted by Jonathan Downing

View all posts by Jonathan Downing