Centralized Exchange: It's Dis-advantages In The Cryptoecosystem

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Introduction

Good day friends , Good morning all, Today I wish to talk about a very interesting topic with you.
This topic I want to share with you is a very crucial topic in the crypto world. Stay tuned as I quickly throw more light on this crypto growth related topic.

Centralized exchange as we know is understood to be a cryptocurrency trading platform, where the exchange of cryptocurrency is being done under the supervision of a central authority.

And today, we will be learning about it's disadvantages in the cryptospace.

Disadvantages Of Centralized Exchange

Although centralized exchange has gained lots of fame and popularity in the cryptospace, it is not without dis-advantages, and here we are today, we will be discussing on these dis-advantages.

• Security Concern:

The heightened risk of security breaches is one of the major dis-advantages of centralized exchange.

Since user's funds on this platform is being stored in a centralized manner, it becomes a target for hackers whose aim is to exploit vulnerabilities.

High profile incident such as coincheck hacks and Mt. Gox have underscored the risk involved with the storage of large amount of cryptocurrency in centralized exchange wallet.

• Lack Of Control:

The lack of control of users is another dis-advantage of centralized exchanges.

A significant control over user's transactions and assets are being excerised by the centralized exchange.

Here, users must put trust in these exchanges to safeguard their funds, and whenever any issues arise, a solution will be sought for following the policies of the exchange.

This lack of user's control is in contradiction to the ethics of decentralization governing the operation of cryptocurrency, where emphasis is often laid on user's empowerment, while they have full control over their funds.

• Custodial Risk:

Another dis-advantage of centralized exchange is what we know to be custodial risks.

The operation of the centralized exchange is done using custodial model, where users will be required to deposit their assets into the wallet of the exchange.

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With this, a risk of assets mismanagement is then created,

Situations of insolvency, mismanagement, fraud on the side of the exchange may lead to a loss of user's assets.

• Single Point Of Failure:

Another issue of great dis-advantage with centralized exchange is the issue of single point of failure.

Within the cryptocurrency ecosystem, centralized exchange serves as a single point of failure.

If a centralized exchange should be faced with challenges such as security breach, technical issues or even regulatory challenge, this can cause a resistance to the entire trading infrastructure and also affect every user trading on its platform simultaneously.

This concentration of risk is in sharp contrast to the resilient and decentralized nature of the blockchain technology.

• Regulatory Vulnerability:

Regulatory Vulnerability is another dis-advantage of centralized exchange.

Centralized exchanges are subject to compliance requirements and regulatory scrutiny which can be different according to jurisdiction.

Unexpected legal changes or changes in regulation often lead to a challenge in the operation of these exchanges.

Users may experience the challenge of frozen assets, closure of an exchange or even face disruption as a result of regulatory actions, which may have an effect on their ability to access their assets.

• Lack Of Anonymity:

The lack of anonymity in the operation of centralized exchange is one of its dis-advantages in the cryptospace.

Centralized exchanges always make it a requirement for it's users to undergo several verification processes, including the kyc procedures.

This is not in allignment with the anonymity that is being seeked by many cryptocurrency enthusiasts.

The issue of privacy concerns is being raised as the platform demands personal information, and for users to be able to participate in trading activities, they will have to provide such sensitive details.

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Conclusion

While several advantages such as liquidity is being provided to users by centralized exchanges, users shouldn't be blind to some of it's dis-advantages.

As we proceed our discussion, we will learn about more concepts in the cryptospace.