The decentralized ecosystem of blockchain and cryptocurrencies has already significantly won over spheres of influence from various centralized structures, such as familiar exchanges and banks. But not everything is so simple — there are a number of problems that decentralization has not yet solved. Therefore, there is a shaky parity between centralized and decentralized exchanges, since they complement each other, to some extent compensating for the shortcomings.
At the same time, the solution has already existed (for quite a long time) — these are hybrid exchanges that can apply the advantages of both centralized and decentralized solutions. Let's look at the conditions for the emergence of hybrid exchanges, why they are better, as well as the features of hybrid solutions.
Prerequisites for the Hybrid Exchanges Emergence
As you know, cryptocurrency exchanges are the only environment for the purchase, exchange, and sale of Bitcoin (BTC) or any altcoins. Two types of exchanges are common — centralized (CEX) and decentralized (DEX).
In 2015–2016, centralized exchange dominated the cryptocurrency market. At the time, users have learned well that centralized exchanges are the only possible way to trade crypto assets. Special companies were created to develop such exchanges, which, by the way, were not so numerous.
Everything changed after the cost of Bitcoin rose to $10,000. It was then that many startups competing with each other appeared. This competition benefited the industry — high-tech centralized crypto exchanges were created. However, even such CEXs had their own "security holes." The way out was quickly found — decentralized exchange solutions appeared on the market.
CEX vs DEX
Among the advantages are good scalability, liquidity, attractiveness for large transactions, and exchange speed. However, CEXs have many drawbacks. Among them are high trading fees, the need to register in accordance with KYC, and security problems. Such exchanges act as intermediaries, i.e. act as a third party, which violates one of the main ideas of cryptocurrencies. This means that traders have to trust their funds to exchanges, where, as practice shows, there is a considerable likelihood of manipulation, government interference, and loss of assets due to hacker attacks.
For example, in September 2017, the work of the largest exchange in China — BTCChina was suspended after the introduction of a national ban on operations with cryptocurrencies. The same thing happened in India. Or remember the large-scale hacks of Mt exchanges: Gox, Bitfinex, Bitstamp and Coincheck, which saw users lose millions of dollars.
To date, DEXs have grown significantly due to several factors.
The use of automated market makers (AMMs) and liquidity pools ensures decentralized trading on DEX, attracting users with better trading opportunities and less slippage.
Decentralized exchanges (DEXs) have a high degree of protection, since funds are stored on the user's side, and not on exchanges. DEXs keep their customers private as they do not require them to sign up for KYC. On decentralized platforms, deals are held on an equal basis for their participants, without the mediation of a third party, which reduces operating costs and trade fees.
Note, that both exchanges do not provide full functionality that guarantees effective trading in the market for institutional and retail investors.
Why Is It a Hybrid Crypto Exchange?
Vitalik Buterin, co-founder of Ethereum, in an interview with TechCrunch, wished centralized crypto exchanges to "burn in hell" and acknowledged that hybrid and semi-centralized exchanges are a much better solution than fully centralized exchanges. Such an emotional remark is explained by the too-serious influence of centralized exchanges on the cryptocurrency market — they often decide which currencies to list and which ones not to.
Simply put, hybrid exchange (sometimes called semi-centralized) adds decentralization components to a centralized platform. For example, in some cases, users can trade directly with their wallets with tokens entered into a smart contract before trading begins. This ensures that no third-party organization stores user funds, which reduces potential security risks.
In other words, hybrid exchanges are a combination of the best centralized and decentralized solutions. For example, the hybrid Nash.io platform offers CEX functionality, transparency, and liquidity, and at the same time DEX security and anonymity.
Another example of a hybrid exchange is ApolloX, a unique hybrid exchange where you can select DEX or CEX mode simply with a switch in the interface. You can buy only Bitcoin or ApolloX domestic currency, but for dollars or one of many other currencies that the site supports. Using fiat currency requires a Visa/Mastercard.
So, the emergence of a hybrid exchange of cryptocurrencies speaks of one thing — the development of exchange sites is still ongoing.
Advantages Of Hybrid Crypto Exchanges
These days, more users prefer decentralized exchanges. On the other hand, there are people who need a guarantee of their investments, which can only be possible through centralized exchanges. That is, crypto traders need a platform that can protect their assets and personal data, while providing ease of use.
And combining two models in a hybrid solution just reduces these risks.
The main advantages of hybrid exchanges are the growth of investor confidence, both retail and institutional; elimination of a third party; reliable storage. And this is due to the fact that hybrid crypto exchanges are a unique means of bridging the gap between the advantages of centralized exchange and the advantages of decentralized exchange.
Brief on other benefits:
- Convenience: Hybrid exchanges offer a convenient way to trade cryptocurrency and fiat currencies all in one place.
- Liquidity: High liquidity makes it easier to buy and sell large volumes of cryptocurrency without significantly affecting the market price.
- Advanced trading instruments: Some hybrid exchanges offer advanced instruments such as margin trading, futures trading and stop loss orders that can be useful to more experienced traders.
- User experience: Often more user-friendly interfaces than DEX.
- Customer Support: Many hybrid exchanges offer customer support services that can be useful if you have any questions or issues with your account.
CEX + DEX = HEX
Hybrid exchanges are no longer few: several of them are known, such as Qurrex, Eidoo, CoinCasso, PryvateX, Stoxum, Joyso. They position themselves as "trailblazers," but they each have different grounds on which they see themselves as "hybrid." All of them have something in common — a combination of CEX availability and speed with enhanced DEX security.
These hybrids take advantage of the best capabilities of exchanges, such as fiat integration, decentralized security, a robust user interface, transparency and minimization of front-end launch. On a hybridized platform, the user manages his private keys, which are stored in cold wallets.
The Qurrex hybrid exchange works for the "trust" of users, which, among other things, promises to provide customers with audit functions and all the necessary information, namely: quarterly reports, audit results, and "reports on the operation of the system from an independent commission."
Another hybrid CoinCasso platform also directly allows users to store their private keys. An interesting detail reported by the head of this hybrid exchange, Luke Ozimsky: thanks to the use of the hybrid model, they can share their profits with the community.
Sharing profits with the community is not typical of CEX, but it brings closer to the ideal of Satoshi, who wrote not only about creating reliable platforms but also expanding the opportunities for communities to manage them.
So it seems that hybrid exchanges are really ready to dominate crypto-exchange.