Decentralized vs Centralized Exchange

Coinbase bought a “decentralized” crypto exchange. How does that work?


via qz

Last week, the major cryptocurrency startup Coinbase acquired a company called Paradex. This company is known as a “decentralized exchange” (or a “DEx,” if you want to be down with the crypto cool kids). This new type of exchange is said to be a safer way to trade crypto coins—which is pretty useful, given that over $4 billion worth of cryptocurrencies have been stolen from exchanges between 2011 and 2017, according to a Reuters estimate.

What makes a decentralized exchange decentralized? First it’s helpful to understand what the status quo for a normal crypto exchange is. It works like this: A customer wires money to an exchange’s bank account, and then waits a few days for those funds to be credited to her exchange account. Once the funds are in, she can buy or sell crypto coins with those funds. During this time, the exchange holds her funds—whether in fiat or crypto currency—and is responsible for keeping them safe. When she’s done trading, she can also swap those funds into fiat currency and have that amount wired back to her original bank account.

The chief benefit of a decentralized exchange is that a trader doesn’t have to entrust her funds to anyone. Instead, she trades directly with another party, using a blockchain to finalize the operation. She holds her funds in her digital wallet and trades them using the decentralized exchange to find a buyer or seller for her coins. This eliminates custody risk, which is the risk that something bad happens to the customer’s funds while the exchange operator is in charge of them. That includes losing funds to hackers or having to trust that the operator isn’t doing anything suspicious with your money.

Both of those scenarios have happened regularly in the short life of the crypto exchange world. Famously, Mt. Gox, once the world’s largest bitcoin exchange, was hacked for hundreds of millions in 2014. Last year, two of the world’s biggest exchanges, both based in China, used $150 million of idle client funds to buy wealth-management products, triggering an investigation by the central bank.

Coinbase says its purchase of Paradex will pave the way for its customers to trade “hundreds” of tokens in the future. Given Coinbase’s substantial customer base of over 20 million users, this could lead to a significant uptick in activity in the token markets.

But this raises the question: If an exchange is decentralized, how could a corporation have acquired it? If the very nature of a DEx is that it disperses trading activity, what exactly did Coinbase buy?

But this raises the question: If an exchange is decentralized, how could a corporation have acquired it? If the very nature of a DEx is that it disperses trading activity, what exactly did Coinbase buy?

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Would love to hear others explanation of this. The only way that I can think of it is that they bought and are paying the team to develop it. In a way it sounds like it will be similar to ICON’s dEX in that yes the code creation is centralized (like many other crypto’s) but the actual network will be decentralized through nodes. Like ICX, NEO, and many others are doing.

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buying all of the above… talent, team, brand, and then, of course, revenue stream.

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