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The evolution of crypto exchanges

crypto exchange evolution

December 23, 2020 | 

JOHN K MWANIKI |  0 Comments| 

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From the time Satoshi Nakamoto released Bitcoin, the crypto sector has only been improving. Of the whole sector, the evolution of crypto exchanges has been evident. 

This article looks into the various developments for the crypto exchanges;

The Evolution of crypto exchanges into a hybrid status 

One of the most evident evolution of crypto exchanges has been on the operations. The early age of crypto exchanges started as decentralized entities. They relied on no single authority for regulations. 

They soon began attracting several traders with increasing liquidity. Within no time, they were transacting more than billion-dollar monthly transactions. They were no longer the outlier but integrals in the financial system

The growth came about with the security hitch. Most of the decentralized crypto exchanges were targets of attacks. The traders had to transfer their earnings to private wallets

The need for protection led to the evolution of crypto exchanges. They started operating based on traditional financial exchanges.  Some like Coinbase came with improved security features. They had several regulations in place and allowed fiat currency exchange and pairs. 

Still, the centralized exchanges proved not to be hack-proof. This was after the attack of Bithumb in 2018. Traders in the largest crypto exchange in South Korea lost around $31million. This was quite a massive loss to the financial world. 

To put it in perspective, the highest theft in traditional exchanges was a loss of $30million. 

Such concerns have led to the evolution of crypto exchanges to hybrid status. This is where they keep both the centralized and decentralized features. The crypto exchanges now work with the flexibility of the decentralized platforms. Traders can access digital assets like Bitcoin, Ethereum, and other cryptocurrencies. 

The digital assets in the platforms also come in various formats. They support options, margin, and futures trading. 

The hybrid exchanges also offer the security of centralized exchanges. They have the anti-money laundering mechanisms in place. Most of the large transactions must involve Know-Your-Customer protocols. 

Such developments mean the crypto exchanges are more secure than ever. This is at the same time when they provide the needed assets. 

The Evolution of Crypto Exchanges Regulations 

The crypto regulations are one of the top evolving crypto exchange aspects. It has been moving at a similar speed to that of the crypto developments. 

As decentralized entities, most of the crypto exchanges had no regulations. Starting a crypto platform was like any other fintech. One only needed financing to create the platform. Starting to trade in the platforms was easier. 

The lack of regulations, though, came with several challenges. One of the concerns was security. The earlier exchanges were susceptible to hacking and theft. One of such cases was Mt. Gox hacking

The crypto exchange was one of the largest in the early days. It attracted several traders who trusted it with their digital assets. It yet went down in 2013 after a hacking case. It then filed for bankruptcy with investors losing over $130m.

Such cases have prompted the government to introduce regulatory measures. The first of the measures was the anti-money laundering protocols. The exchanges had become conduits for money laundering and other illicit trading. The government had to move to stop access to such illicit acts. 

Countries like the USA provide for high profile regulators. Unlike before, crypto exchanges now operate like the traditional forex exchanges. They undergo intense scrutiny before getting any certification. They also have to provide for security like insurance and cold storage facilities.

Crypto is a risky investment strategy. The exchanges must ensure the trader knows the risk they take investing in digital assets. 

Several countries are advancing their regulatory provisions—top of that are countries in the European Union. The EU Commission has provided an exhaustive regulatory framework. It would impact the crypto exchanges. It will mark one of the biggest evolutions of crypto exchanges ever. 

What the Evolution of Crypto Exchanges mean to the crypto world

The evolution of crypto exchanges is everything right with the digital currency markets. It is the ultimate show of development within the alternative financial systems. 

One of the results of the evolution of crypto exchanges is attracting institutional investors. Professional and institutional investors have avoided virtual assets for a long time. This is due to the high regulatory provisions. They can't take as much risk as individual investors. 

The evolving crypto exchanges have made it possible for them to trade in recent times. They have become secure enough with cases of hacking and theft going down. This follows security measures like cold storage and insurance services. 

The exchanges have also become regulatory complaints. Better still, they offer structured digital assets like margin and futures trading. These assets offer benefits of the underlying digital asset without the accompanying risks. They don't experience volatility and security risks. 

The Future of the Evolution of Crypto Exchanges 

The evolution of crypto exchanges will not end any time soon. Already the government has allowed commercial banks to offer cryptocurrency custodian services. This brings a new competitor to the crypto exchanges.

The crypto exchanges must develop to edge the traditional financial services providers. They need to gain the trust of the users to sway them from the banks. Otherwise, they would be at the start of their end. 

Still, from the evolution of crypto exchanges, they are likely to rise to the occasion. All the crypto exchange developments are a result of providing for consumer needs. They are always evolving to meet customer demands. In this case, they are also likely to reach the bank level. They will have a similar regulatory and operational framework. 

There is also the possibility of not competing with banks at all. They can also cooperate with them to offer crypto custodian services on behalf of the banks. Some banks have already considered the option. They will either hire the crypto exchanges or buy them out. Either way, the banks will remain as fiat currency service providers. The crypto exchanges will also still handle the digital currencies.

Bottom Line

The evolution of crypto exchanges is all about meeting customer demands. They are always looking for ways to make the trading experience more seamless. The future looks to more crypto exchange developments. 

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