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Whale Call: AirSwap Decentralized Exchange Upgraded for Any Size Trades

AirSwap is rolling out some pro tools to attract institutional investors to its decentralized exchange (DEX) for ethereum tokens.

Revealed exclusively to CoinDesk, the company is this week launching an interface for so-called over-the-counter (OTC) block trading. While to date AirSwap users have been signaling their intent to buy or sell a certain amount of tokens at a certain price on a take-it-or-leave-it basis, the new front end includes a chat feature so traders can negotiate the terms privately. Large, sophisticated investors often prefer trading this way rather than broadcasting a large order that could move the market.

The new interface also includes an identity verification system, with the ID checks performed externally by Wyre, a regulated money services business (MSB). This helps institutional players such as broker-dealers to comply with regulations that require them to know who they are trading with.

Put together, these features should address the worries that have kept DEX-curious institutional investors at bay, bringing a large amount of capital into this market, AirSwap said.

“It essentially allows your more flexibility on price and the ability to know your counterparty, assess with whom you’d like to do business more directly,” co-founder Don Mosites told CoinDesk of the new service, adding:

“With the OTC tools, this unlocks a totally new world of liquidity. This is going to enable trades of any size to happen with the AirSwap network.”

While institutions have been dipping their toes in the crypto markets for some time, it may seem odd that these highly regulated entities would take an interest in decentralized exchanges, given that such platforms were born out of anti-establishment, cypherpunk ideals.

But according to AirSwap, and some of the broker-dealer and hedge fund representatives who attended a demo day at the startup’s Brooklyn, N.Y., office last week, DEX appeals to such players for a practical reason.

Unlike the centralized exchanges where most cryptocurrency trades take place, a DEX, by definition, allows investors to control custody of their private keys.

That’s not to say all institutions want to handle custody themselves, as hardcore crypto users do. But some would prefer to choose the third-party custodian rather than handing that role to cryptocurrency exchanges, which are notoriously bad at protecting user funds.

In this way, it’s telling that BitGo, the multi-signature wallet provider, recently added support for AirSwap’s AST tokens (which traders must stake in order to advertise their intent to trade on the DEX’s bulletin board). BitGo has been courting high-end custody clients recently, and it said supporting AST was likewise a response to demand from hedge funds and other institutional investors.

Institutional and retail

AirSwap claims its DEX, which fills orders via smart contracts on ethereum, offers a more efficient way to conduct OTC trades, which today are often negotiated over Skype and can take days to settle. But the roadblocks to the institutional use of DEXs are significant.

A lack of accountability is one of the deal-breakers for big-money investors, according to Preston Byrne, an independent blockchain consultant. Most DEXs offer scant options for negotiation or recourse against bad actors.

“That’s one of the reasons you have big counterparties in transactions. It’s an insurance policy,” Byrne said.

Further, in practice decentralized systems are often less efficient than centralized platforms, which Byrne said makes investors wonder:

“Why are we paying the decentralization penalty if we’re not getting all the functionality of an OTC trade, which is individually negotiated and varies somewhat from the current market price?”

The new features AirSwap is adding are designed to address those concerns for institutional investors, whom the company has been courting since its founding last year. But it may also come in handy for projects that are seeking to get their tokens in the hands of everyday consumers.

For example, when the journalism startup Civil launches in October it plans to integrate AirSwap’s widget, which facilitates the purchase of tokens from a third party’s platform. (More than 16 blockchain projects that use ethereum’s ERC-20 standard tokens, from the adult entertainment platform SpankChain to the prediction market Augur, are integrating AirSwap widgets directly into their platforms for this purpose.)

During the first year, the only way to buy Civil tokens will be through a know-your-customer (KYC) process for consumers that proves the buyer is a reader or participating journalist who knows how to store and use cryptocurrency.

Civil CEO Matt Iles told CoinDesk AirSwap’s new KYC capabilities, coupled with its atomic swaps and price discovery mechanisms, suited his project’s efforts to grow a closed ecosystem without sacrificing liquidity.

Looking to the future, there will be ways for Civil readers to earn tokens for supporting a newsroom, sharing content, or helping to refer new members to a newsroom. As such, the OTC block trading functions could apply down the line to experts looking to convert those rewards into a more diversified portfolio.

“We’re both trying to pioneer what this consumer token world could look like,” Iles said. “AirSwap is interested in exploring this consumer space with us as something that is going to grow and become a larger part of their offering.”

Image of AirSwap co-founder Michael Oved (L), trading with investor Michael Novogratz (R), as AirSwap advisor Maxime Bucaille (standing) looks on, via Lucas Hoeffel

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Binance Offers First Look At Planned Decentralized Crypto Exchange

Cryptocurrency exchange Binance unveiled the platform’s first look at its upcoming decentralized exchange (DEX) on Thursday.

Binance, one of the world’s largest cryptocurrency exchanges by trading volume, announced back in March that it plans to launch a new public blockchain for the purposes of developing the Binance Chain, a platform to transfer and trade different crypto assets without a centralized operator. This week, CEO Changpeng Zhao provided the first demonstration of the Binance Decentralized Exchange and the Binance Chain.

“Today, I have something really exciting to share with you guys. This will be the first demo for the Binance Decentralized Exchange, the Binance Chain,” Zhao told viewers.

Zhao explained that his team of developers is ahead of schedule, saying in the demonstration that “I thought this would happen one to two months later or more but again, the team delivered early.”

While the majority of the demo is footage of a command line terminal voiced over by one of the Binance Chain developers, the various activities depicted outline the basics of issuing, listing and trading crypto assets on the decentralized exchange.

Zhao insists the product remains in “early stage development,” adding that:

“There’s still a ton of work to be done to turn [it] into a final product. The team’s working on it very aggressively. Nevertheless, this is a major milestone for Binance Chain.”

Indeed, other competitors to Binance such as cryptocurrency exchange Huobi announced similar plans in June to fund the creation of an open-sourced blockchain protocol aimed at one day evolving into a standalone decentralized exchange.

And while there are decentralized exchanges currently in existence in the crypto markets, data by analytics firm Alethio reports that most have varying degrees of centralization built into their model.

In fact, sentiment as of late around the security of decentralized exchanges as a whole has taken a hit with one decentralized crypto exchange by the name of Waves being hacked of funds almost immediately after launching from a year-and-half-long beta period.

Changpeng Zhao image via YouTube

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Radar Relay Raises $10 Million for Decentralized Token Exchange

Decentralized token exchange Radar Relay has completed a $10 million Series A funding round.

The funding effort was led by industry investment firm Blockchain Capital, the startup announced Wednesday. Tusk Ventures, Distributed Global, Reciprocal Ventures, Elefund, Slow Ventures, SV Angel, Kindred Ventures, Collaborative Fund, Breyer Capital, V1.VC, Kokopelli, Village Global, Chapter One and Digital Currency Group also contributed funds.

The money will be used to expand the startup’s community team and start new research and development projects, according to CEO Alan Curtis. The funding effort comes after Radar Relay raised $3 million in December 2017 in a round also led by Blockchain Capital.

Radar Relay provides a wallet-to-wallet trading platform for ethereum tokens. Investors can connect their wallets to the platform to exchange tokens directly, without the startup ever taking any tokens into custody.

The company sought to raise the funds due to the platform’s popularity, Curtis added. While the platform appears to be widely used, only a small portion comes from the U.S., which makes providing support for the vast majority of Radar Relay’s users difficult.

The company now hopes to expand the team in order to help reduce some of these concerns.

Curtis explained:

“We are supporting users from 150 countries. Of those countries, less than a third of our users are from the United States, which means we have to have core competencies in those [other] countries. Part of this funding is to establish a community ambassador program in those countries so we can serve our customers abroad.”

The community ambassador program will see Radar Relay hire individuals fluent in various languages and able to provide support for users, he said. But according to Curtis, the startup’s beta phase saw a notable amount of activity from users.

“We just left beta about a month ago and during that beta we saw $1 million in transaction volume,” he said.

As such, expanding the team to meet support demand will be a key focus for the next month or so. Alongside that, Curtis added, the firm plans to start exploring how to support security tokens and crypto collectibles.

Ethereum token wallet image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Decentralized Exchange Waves Scored a $6 Million Debut. Then It Got Hacked

When a decentralized cryptocurrency exchange supports fiat tokens and courts banks, yet makes customer identification optional, all bets are off.

According to data provided to CoinDesk by the blockchain project Waves, the company’s new decentralized exchange (DEX) was facilitating $6 million of crypto transactions a day in beta testing last month. That’s six times the daily volume that a rival DEX, AirSwap, boasted at its debut in April.

Waves, which is incorporated in Switzerland but headquartered in Russia, also told CoinDesk its DEX had 90,000 traders using 330,000 wallets ahead of its full launch this week – dwarfing the comparable figures for other DEXs.

There are a few reasons for this impressive performance coming out of the gate. One is speed, courtesy of the platform’s centralized matchmaking service – highlighting the contradictions inherent in so-called DEXs, which have a way to go before they live up to their name.

Another factor is that almost any trader can issue a token on Waves’ unique blockchain, even one that represents an IOU in fiat currency, and instantly trade it for bitcoin on the exchange.

Not least of all among its attractions for traders, standard know-your-customer ID checks are optional in this marketplace except in certain circumstances.

But the rollout hasn’t been all rainbows.

On Tuesday, when Waves officially ended the beta period and launched the full DEX, hackers hijacked both the exchange website and the company’s main site to phish for users’ personal wallet information. It took hours for Waves to regain control of the domains.

“Someone just faked my passport and gave it to support [staff] at the domain company and they changed the password at his request. Then the attacker was able to change the main website,” Waves CEO Sasha Ivanov told CoinDesk.

Undaunted by the incident, or by criticisms of Waves’ security practices, Ivanov told CoinDesk he hopes that even banks will also start launching currencies on his DEX.

He said:

“We are looking for partnerships with major banks because we hope major banks will want to issue their own fiat tokens.”

How it works

In order to transact on the DEX, users need Waves tokens. The broader project raised $22 million by selling these native tokens in 2016. The tokens are also used to run smart contracts and incentivize node operators on the Waves blockchain, a model similar to ethereum.

The network has garnered more than 200 unique nodes, including two run by the Canadian mobile gaming company RewardMob, which sees the DEX as a key attraction.

“Now we don’t have to worry about currency control from different countries and players wanting to cash out in different currencies. It allows players to trade their tokens between other players…The decentralized exchange was a huge, key component in our decision to go with Waves,” RewardMob CEO Todd Koch told CoinDesk.

His company launched its own Waves-based token and is preparing for an ICO. It operates tokenized rewards for multiple video games, such as a beer pong app, and maintains back-end wallets for more than 100,000 users.

“We want to integrate the DEX right into our app so that [when] a player earns our currency, they could easily exchange it for Waves or bitcoin or any other cryptocurrency,” Koch said.

Since the Waves DEX matchmaking software is open source, numerous nodes could run their own matchmakers and almost act like cryptocurrency miners earning fees (in Waves tokens) for processing trades.

But most of the trades are going through Waves’ own central matchmaker.

Dean Eigenmann, co-founder of blockchain governance startup Harbour and of the DEX project Dexy, found this approach dubious, saying it defeats the purpose of a DEX if service can be denied by a central authority.

Ivanov acknowledged that the current state of affairs is out of step with the decentralized ethos and will have to change. He said:

“A centralized matcher can just say ‘I don’t accept the trade,’ for now, so it’s important for us to make it more trustless.”

Compliance

The Waves DEX generally requires identity checks in two instances: when users opt for fiat cash out, through the Czech Republic-based payment processor Coinomat, a separate company Ivanov launched in 2013; or when they issue a token on the Waves platform and then list it publically on the DEX.

Private token issuance traded through private listing options, according to Ivanov, does not require identity checks for compliance. And neither does trading of bitcoin for other tokens.

“For now, you can do crypto-to-crypto trading without any type of KYC,” Ivanov told CoinDesk.

But Drew Hinkes, chief legal counsel and co-founder of the crypto advisory firm Athena Blockchain, told CoinDesk that exception probably doesn’t apply to users in the U.S.

“We know from the 2013 guidance issued by FinCEN [Financial Crimes Enforcement Network] that a lot of people in the crypto ecosystem need to have a BSA, the Bank Secrecy Act, and AML, which is anti-money laundering, compliance programs,” Hinkes said. “Those programs are required to include customer identification programs.”

According to this guidance, if an exchanger accepts or transmits a virtual currency, or if the exchanger buys or sells virtual currency for any reason, they are a money transmitter under FinCEN’s jurisdiction, and thus required to check ID.

“The guidance says that, when defining a money transmitter, they don’t care whether you use real currencies or convertible virtual currencies,” said Hinkes, who is also an adjunct professor at New York University’s School of Law and Stern School of Business.

Meanwhile, Waves node operator RewardMob requires users to hand over personal information such as their full names and addresses, according to Koch, who cited requirements of Canadian sweepstakes law.

Security

This week’s phishing attack not only put a damper on the DEX launch, it also prompted criticism of Waves’ practice of having users enter their recovery seeds – strings of words that act like passwords for crypto wallets – into a website to use its software wallet.

Drawing a different lesson from the hack, Ivanov said, “We and the whole industry need to work on decentralized domain name systems.”

The incident was not the company’s first brush with security flaws, though.

In 2017, an audit by the cybersecurity firm Kudelski Security pointed out Waves’ unique blockchain was susceptible to several types of attack and that users’ wallet passwords were stored in a cleartext database that was “readable to anyone accessing the file system.”

When asked about this, Ivanov said:

“Most of the recommendations were carried out. As for the passwords, all the critical moments have been fixed. They are still stored in a clear config file.”

Eigenmann said he was unimpressed with Waves’ infrastructure or ICO.

“It’s just embarrassing the level of software development skills which goes into some of these projects,” he told CoinDesk. “I don’t see any real value in tokens for exchanges.”

Regardless of the controversy, Waves’ volume is staggering for a new exchange with self-custody options.

According to Waves’ internal data, on June 23rd alone DEX traders swapped Waves tokens for $1.59 million worth of bitcoin and $251,697 worth of monero, just to name a few.

Ivanov said he was grateful to the community for supporting their ICO and is eager to deliver real value to global businesses.

“Our blockchain is quite fast,” he said, claiming Waves can process 500 transactions per second. “We have a very active Brazilian and Turkish community, you can even trade a token Lira on our exchange.”

Bank vault via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

This article is intended as a news item to inform our readers of various events and developments that affect, or that might in the future affect, the value of the cryptocurrency described above. The information contained herein is not intended to provide, and it does not provide, sufficient information to form the basis for an investment decision, and you should not rely on this information for that purpose. The information presented herein is accurate only as of its date, and it was not prepared by a research analyst or other investment professional. You should seek additional information regarding the merits and risks of investing in any cryptocurrency before deciding to purchase or sell any such instruments.

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Decentralized Exchanges Aren't Living Up to Their Name – And Data Proves It

Some say a “decentralized exchange” is an oxymoron. Perhaps not, but for now it’s not much more than an aspiration.

Over the past year, dozens of cryptocurrency trading platforms have marketed themselves as decentralized exchanges. While models vary, the term implies they allow users to trade on a peer-to-peer basis, and more importantly, without using a platform operated by a single entity.

The main selling point is that unlike today’s better-known crypto trading platforms (think Coinbase, Kraken or Binance), a decentralized exchange shouldn’t require traders to store their money with a third party that can be hacked. Yet while “DEX” has been a hot buzzword, it’s been unclear how decentralized they actually are.

Early indications, however, suggest they’re not living up to their name yet.

According to data collected exclusively for CoinDesk from July 2 to July 12 by the ethereum analytics firm Alethio, as well as interviews with market participants, what decentralized exchange models actually offer is a spectrum of technologies with varying degrees of centralization.

Some attempt to decentralize a traditional exchange company, such as the Huobi Chain Project announced in June, while others seek to build a community with stakeholders around a peer-to-peer model, like 0x.

“Decentralized exchanges are making headway toward the re-elimination of central parties in that [crypto trading] system,” said Wall Street veteran Jill Carlson.

But they still have quite a ways to go.

Alethio data analyzing DEXs from July 2-12.
Note: RadarRelay is a 0x relayer.

For example, Bancor was itself the only market maker on its decentralized platform, where it facilitated roughly 9,691 token swaps between 1,147 traders over the two-week period, Alethio found.

That lack of diversity compounds a problem with the “decentralized liquidity network,” highlighted by the steps Bancor took to address a recent $13.5 million hack. Specifically, Bancor’s freezing of funds, an action allowed by a mechanism in its code, prompted criticism that the platform was, for all intents and purposes, no different than its centralized predecessors.

“You’re not a ‘decentralized exchange’ if you’re taking away other people’s tokens whenever you want,” tweeted developer Udi Wertheimer.

Decentralized how?

One problem with talking about decentralization in this context is that it can be measured in different ways. An exchange platform might be highly centralized in one dimension but quite decentralized in others.

Take, for example, 0x. During the two weeks tracked by Alethio this open-source protocol that relies on independent relayers for token trading, had 914 market makers facilitating 9,017 trades by 234 traders – already head and shoulders above Bancor in the diversity-of-participants department.

However, those trades are funneled through a much smaller number (17) of “relayer startups.” Each relayer has its own business model, and the majority of them use their own proprietary software built on top of 0X, rather than purely open-source code that anyone can inspect.
And while 0x isn’t responsible for compliance with regulations, its relayers are. So it’s hard to call this type of DEX leaderless.

One of those relayers, Paradex, was acquired in May by Coinbase, a company that many in crypto would call the quintessential centralized exchange.

To be fair, though, it could be argued that the 0X ecosystem is arguably more decentralized than other exchanges in the way that counts the most.

“It’s different from a centralized exchange because these relayers are not holding user funds at all. They are completely non-custodial,” Amir Bandeali, CTO of 0x, told CoinDesk. “We have seen a lot of relayers starting to make open source market-making tools.”

For Carlson, who works as a consultant to 0x, the term “decentralized” should primarily apply to non-custodial trading platforms. As such, she believes hacks such as the Bancor theft point to the dangers of centralized custodians, telling CoinDesk:

“When we talk about decentralized exchanges, the primary threat that people are concerned about today is custody.”

Early days

Stepping back, it’s important to remember that the DEX market is in its infancy, and so the volume is still pretty low.

Indeed, among the DEX platforms analyzed by Alethio, the most popular was IDEX, an exchange developed by the fintech firm Aurora, which facilitated 69,339 swaps between 12,400 traders during the two-week period.

Compared to centralized Bitfinex, which facilitated roughly 92,024 trades in just two days, from July 9 and 10, according to CoinDesk’s analysis of its trade history, IDEX’s volume is a tiny drop in the niche bucket.

Marshall Swatt, founder of the institutional crypto asset exchange Swatt Exchange, argued that decentralized exchanges are merely “a fancy form” of over-the-counter (OTC) trading that won’t be able to scale. He told CoinDesk:

“I just think the lack of fiat on-ramps, the lack of governance, and the lack of compliance, are going to relegate decentralized exchanges to the margins.”

Swatt, who previously co-founded the New York bitcoin exchange Coinsetter then sold it to Kraken in 2016, warned against underestimating the difficulty of managing compliance, security, and customer support, business departments that may not fit bitcoin’s grassroots model.

“You’ll never have the level of liquidity because it will never attract the algorithmic traders,” he said.

Indeed, most DEX models only allow users to swap one cryptocurrency for another, which keeps newcomers to crypto, whether they be institutional investors or first-time buyers, at bay.

Carlson agreed it’s hard to imagine decentralized order books, market makers, or know-your-customer identity checks. These are all core pillars of most popular exchanges.

However, in her view, it’s an oversimplification to say DEX is merely glorified OTC.

“The difference here, at least today, lies at the settlement level, not at the execution level,” Carlson said, speaking to how some DEXs allow P2P settlement without third party oversight or custody. “What you end up with is an experience that is disintermediated.”

DEX fever

Indeed, none of the shortcomings of current decentralized exchanges have quelled the DEX fervor sweeping the industry.

Speaking to the Paradex acquisition, Scalar Capital co-founder Linda Xie, a Coinbase alum turned hedge fund manager and 0X advisor, told CoinDesk demand for non-custodial P2P platforms could inspire centralized incumbents to offer DEX options as well.

Indeed, Bloomberg reported the long-established exchange Binance wants to “decentralize” itself. So does the legacy platform provider Huobi, which announced in June it’s offering roughly $166 million to a fund for contributors to the upcoming Huobi Chain Project, which aims to establish a decentralized autonomous organization (DAO) and eventually incorporate parts of Huobi’s exchange.

“We’re not 100 percent sure if a corporation can be 100 percent autonomous,” Gordon Chen, Huobi Chain Project’s executive leader, told Coindesk. “We’re not sure if it can be 100 percent decentralized either. But we believe there can be some kind of balance in between.”

Although granting businesses more sway than users on Huobi’s voter-driven exchange HADAX sparked backlash, a few hundred people already applied to build the project’s public blockchain.

Along those same lines, Bancor co-founder Eyal Hertzog tweeted that his project is also on a “pathway to decentralization.”

Alethio’s data suggests that so far platforms with more straightforward P2P models have achieved more diversity of participants, even if they have so far gained less traction. For example, during this two-week period in July the startup AirSwap, which operates almost like a Craigslist for ethereum tokens, facilitated 695 swaps between 216 traders with the help of 60 unique market makers.

Such potential is why Xie remains optimistic about the prospect of DEXs, saying: “This is still just the start.”

Agreeing with Xie’s point, Carlson said the wide range of models offer a promising starting point for the further decentralization of trading platforms, concluding:

“All aspects of the spectrum have an important role to play.”

Man in maze image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Why Litecoin's Creator Is Buying Into A Bank (And How It Could Go Wrong)

One of the most unusual and potentially transformative deals in the cryptocurrency space started as an argument on social media.

Back in April, Charlie Lee, the creator of litecoin, was exchanging barbs on Twitter with Derek Capo, the CEO of payment processor TokenPay. But their fight quickly turned into a friendly exchange of direct messages, in which the two crypto enthusiasts realized they shared a common problem: In a word, banking.

Both the Litecoin Foundation, the non-profit that promotes the sixth-largest cryptocurrency and where Lee is a managing director, and Capo’s Virgin Islands-based startup had encountered difficulty securing bank accounts – a longstanding problem for the industry.

“We had lots of trouble” on that front, Lee told CoinDesk.

Capo elaborated: “Some banks, they close down bank accounts if they get a whiff of anything to do with crypto. We saw a lot of competitors with similar offerings get cut off because they didn’t own the bank and they didn’t have control.”

But Capo was working on a solution for TokenPay by trying to buy a bank. And he realized this plan, if successful, could address another problem for Lee.

“Why don’t we talk about having a litecoin debit card so that you’ll have a real solution?” Capo recalled telling him. “Because, you know, they had been trying very hard to have a litecoin debit card… I said, why don’t we talk?”

That is how the Singapore-based Litecoin Foundation ended up owning 9.9 percent of WEG Bank AG, an until-now obscure German financial institution, in a surprise transaction revealed this week.

But the foundation didn’t put money in; TokenPay previously acquired the stake and traded it to the non-profit in exchange for future technical support. TokenPay also acquired another 9.9 percent (the maximum allowed in Germany without prior regulatory approval) of WEG and is seeking the green light to buy up to 80 percent. (The price was not disclosed.)

If all goes according to plan, not only will TokenPay and the Litecoin Foundation have a reliable banking partner, they would also transform WEG into an on-ramp for consumers worldwide who want to trade fiat for cryptocurrency or pay for goods and services with crypto.

But owning a bank, by itself, won’t necessarily solve crypto’s banking problem, according to compliance experts who’ve worked in both fields. Even if the regulators bless the pending takeover, Capo and Lee may face new challenges operating in a heavily regulated industry where “coin” is frequently treated as a four-letter word.

The roadmap

Undaunted by regulatory hurdles, Capo and Lee have ambitious plans to usher in a new wave of crypto banking services.

Stepping back, while transacting in cryptocurrency may be frictionless, converting from dollars or euros to crypto and back is anything but. Buying crypto through an online exchange can mean registering a credit card with an exchange platform, then waiting days, sometimes longer, to complete the transaction.

Meanwhile, most of the merchants that accept crypto are wary of the price volatility and generally rely on a payment processor like BitPay to convert it to fiat. All these options incur processing fees along the way.

That’s why Capo wants to offer crypto debit cards and the ability to convert litecoin to euros directly through a traditional bank account, to make it a smoother experience for crypto users transacting in a fiat-dominated economy. He hopes to offer such services within nine months of receiving regulatory approval for the acquisition.

“Connecting cryptocurrency to fiat rails is very useful,” said Lee, who told CoinDesk he aims to join the WEG board as the Litecoin Foundation’s representative (a move that would make him possibly the first person to simultaneously hold the titles of “cryptocurrency founder” and “bank director”).

“We will have a say in influencing the bank to work on crypto projects,” he said.

Eventually, after tackling debit cards and payment processing, Capo and Lee plan to integrate banking services directly with TokenPay’s decentralized exchange (DEX) platform, eFin, which offers peer-to-peer trading between cryptocurrencies.

If traders pass all the know-your-customer (KYC) and anti-money-laundering (AML) demands for a crypto bank account, they will be able to seamlessly cash out TokenPay’s own token, known as tpay, from the exchange as fiat, plus buy or sell cryptos like litecoin without delay.

“eFin will have LTC. We will help them with it technically,” Lee said. “And they will also airdrop [tpay] tokens to litecoin users.”

In addition to the promise of technical expertise and litecoin’s relatively stable popularity among cryptocurrency fans, Capo said he gave the nonprofit equity in the bank based on Lee’s massive online following, a marketing boon, and professional connections.

“Litecoin has a very influential leader, someone who’s been around for a very long time,” Capo said in describing Lee, an alumnus of the popular cryptocurrency exchange Coinbase.

Challenges ahead

Yet even if they obtain a banking license, Capo and Lee are not guaranteed unlimited liquidity.

Located in the town of Ottobrunn (population: 21,378), WEG was previously a property management bank that offered loans to housing associations. After TokenPay acquires a majority stake, the plan calls for the bank’s CEO, Matthias von Hauff, to stay involved as WEG transitions to a retail bank with more consumer-facing products and services.

But such a tiny institution likely would likely rely on outside organizations – larger global banks, the German central bank, or SWIFT – to be able to move large amounts of fiat around the world, according to Simon Taylor, a former Barclays banker and co-founder and director of the U.K. fintech advisory firm 11:FS. If those partners became squeamish about crypto in general, they could cut off WEG’s access to fiat, Taylor cautioned.

“The really, really big banks tend to be the ones that connect you through the global corridor to the U.S. dollar, they’re the ones that get the big KYC fines,” Taylor said, adding, with regard to the WEG acquisition plan:

“I don’t think it’s going to achieve what they want it to achieve. I get the temptation to buy a bank. But buying a bank doesn’t give you what you think it gives you.”

Joe Ciccolo, president of the compliance service provider BitAML Inc., said regulators would probably expect extra diligence on WEG’s part if it were to become a crypto-focused bank.

“On its own, running a bank and implementing AML anti-money laundering] across a broad range of products and services is difficult to begin with,” Ciccolo said. “This is going to be a much higher barrier to entry than one would associate with traditional AML.”

The idea of integrating a decentralized exchange into a bank gave Ciccolo the most pause. He described DEXs as “nails on a chalkboard for regulators,” who have taken years to wrap their heads around bitcoin. If Capo and Lee plan to pull this off, Ciccolo said, it will require significant investment in educating regulators on an ongoing basis and constant communication with larger banks.

Acknowledging the challenges, Capo said the first and most costly step of converting WEG into a crypto-savvy bank will be restructuring all of its KYC and AML processes to create a new crypto-centric model.

“We’re being conservative because we want to build this bank so it will be around for a long time,” he told CoinDesk, concluding:

“The infrastructure is there, we just might have to potentially modify it for crypto-based services.”

Litecoin image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Are Cryptocurrency Exchanges Hurting the Industry?

Cryptocurrency Exchanges–Crypto-based trading platforms have found their way into headlines with increasing frequency throughout the past several weeks.

It began with The Daily Mail reporting on Ben Delo, co-founder of cryptocurrency exchange BitMex, as Britain’s youngest self-made billionaire and the United Kingdom’s first “bitcoin billionaire.”

Binance, the world’s top crypto trading portal by daily volume, grabbed headlines in an interview with Bloomberg, when founder Changpeng Zhao claimed 2018 revenue had already eclipsed 300 million USD, and the exchange was on pace to turn a profit of 500 million to 1 billion USD. With all of the money flowing out of the market capitalization of cryptocurrency during this bear market, the eyebrow raising gains of crypto exchanges has caused more than one investor and industry leader to take note of the money to be made.

Vitalik Buterin, founder of second overall cryptocurrency by market cap Ethereum, threw down the gauntlet two days ago in an interview with TechCrunch, when he stated in no uncertain terms that the state of crypto-based exchanges had caught his ire,

“I definitely personally hope centralized exchanges burn in hell as much as possible.”

In particular, Buterin finds fault with the 10 – 15 million USD fee imposed on cryptocurrency projects looking to be listed on popular exchanges. For example, a new coin that wishes to be listed on Binance’s top-ranked platform must first shell out an enormous amount of money to have that accessibility–development funds that are supposed to be used in improving the coin’s technology, not increasing it’s exchange availability. Alas, the pay-to-play model imposed by most exchanges has created centralized gatekeepers akin to those found in the traditional world of fiat.

While the alternative would be sole decentralized exchanges, where buyers and sellers engage in an open market of direct trading with no intermediaries, the landscape is still in its infancy. Many in the community have taken up Buterin’s rallying call, expressing their anger with the state of cryptocurrency and its heavy emphasis on the power of exchanges.

So, have cryptocurrency exchanges started to do more harm for the industry than good?

It depends on how you view the purpose of cryptocurrency.

A significant number of investors in cryptocurrency are solely that–traders looking to capitalize and make money through an emerging market. For this class of crypto user, exchanges offer the sole purpose and portal to accomplishing their goal, and provide significant advantages over the traditional market: miniscule fees (compared to stock brokers), 24/7 trading and a wide variety of assets to speculate on.

Particularly with the media emphasis on crypto and Bitcoin-based price movement, with CNBC regularly publishing the daily volatility of crypto to its largely removed audience, enthusiasts of the technology have to accept that a large market share is comprised of traders with no interest in learning about the underlying asset. Profit, or at least the promise of profit, is the primary motivator for this group, and they will continue to champion exchanges as the arbiter of their speculation.

But therein lies the problem most community members find with the present state of crypto-based exchanges: the emphasis is entirely on price as opposed to the advancement of technology.

In addition, the process of adoption for cryptocurrency becomes bastardized through the myopic lens of centralized exchanges. Communities, particularly for smaller projects and up-and-coming coins, rally around being listed on new exchanges as a way to gain exposure, rather than focusing on the real adoption of user driven problem solving and real-world use cases. The result is empty scaffolding that leads to the uncertain landscape of the current industry. Coins are pumped to billion dollar valuations through speculation alone, all driven through the back and forth actions of investors on exchanges. Yes, this plows capital into currencies, increasing the development budget of projects in addition to drawing more media attention.

But it also creates the appearance of the “bubble” that has become vogue to bandy about by entrenched Wall Street players. It is hard not to draw comparisons between cryptocurrency, in its present form, and the dot.com bubble that started the new millenium. Decentralized exchanges may not dampen the speculative driven growth, and they certainly do not provide the user-friendly approach of current exchanges, but it does give the process of cryptocurrency use more legitimacy. Trading crypto for crypto, through direct market tunnels as opposed to intermediaries, symbolizes what decentralized money is capable of and how it can differentiate from fiat.

Cryptocurrency exchanges provide the most simplistic solution for giving people, particularly newcomers to the industry, accessibility to their cryptocurrency of choice. But so long as exchanges partake in centralized efforts, they signal to the community of cryptocurrency that their existence is to profit from the industry–whatever the cost may be. Exchanges, like all companies, have a right to pursue profits. But cryptocurrency communities should keep in mind that clamoring for exchange driven growth is prioritizing market cap today in lieu of real adoption.

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Decentralizing Popular Dapps Isn't Just a Scaling Problem

It’s no secret that building large-scale, fully decentralized applications is a challenge, but it turns out the hurdles have to do with more than just scaling.

Decentralized application or “dapp” developers frequently hit roadblocks, since ethereum – the go-to platform so far in dapps’ short history – can process only around 25 transactions per second, and the more transactions the network is asked to handle, the more each one costs the user. These limitations on transaction throughput are commonly referred to as “scaling” limitations, and everyone from the casual dapp user to ethereum founder Vitalik Buterin is keenly aware of them.

So when a particular dapp turns out to be less-than-totally decentralized, with parts of the software running on centralized servers, say, the solution seems obvious.

Speed up transaction throughput and reduce costs, and pure, blissful decentralization will naturally follow.

Turns out, though, things aren’t that simple.

Some of the most popular dapps that currently live on ethereum – which right now fall into two categories, games and exchanges – often retain centralized features, but the reasons have little to do with throughput and instead, revolve around user experience.

Take games – for developers to be able to make updates to a blockchain-based game, they typically put backdoors into the smart contracts.

Otherwise, said James Duffy, a co-founder of Loom Network, which develops ethereum-based dapps including a Q&A site called DelegateCall, developers would only be able to deploy their dapp once and never be able to modify it.

“Obviously if you’re a player in the game you want the developers to be able to update it. You want them to be able to fix bugs, add new levels, add new features,” Duffy said.

On the other hand, decentralized exchanges (DEX) keep some centralization in their processes as it relates to their order books. The reasons for this approach have to do partly with security and partly with the difficulty of assembling a single, reliable order book across a large, distributed network of computers.

And while most of these dapp projects aim to decentralize further in the future, for now, they’re happy to work slowly through that process so that users have the best experience and don’t lose money.

Duffy told CoinDesk:

“No one’s ever built a complicated app and then launched it and it just worked perfectly on day one.”

The back door dilemma

CryptoKitties was the first decentralized application to gain widespread attention and a significant userbase.

It didn’t take long, however, for critics to notice that the game is not as decentralized as it initially seemed. Another Loom Network co-founder, Luke Zhang, wrote about the backdoors in the CryptoKitties code, which allows the company behind the game to pause it entirely or alter its closed-source breeding algorithm.

While the CryptoKitties team contends that keeping the breeding algorithm a secret makes the game more fun, this choice does mean users have to trust the company itself not to tweak the algorithm in a way that would undermine the market’s pricing of kitties (some of which are very rare and in turn very expensive).

Another piece of the Cryptokitties game that was under the company’s control, until very recently, was the art assets.

Without these, a player would still own that kitty they paid 250 ether for, but instead of being able to admire its green eyes and Himalayan, orange soda-colored fur, they’d have to admire the number sequence encoded in the non-fungible token that’s at the core of the game: 99ac5586a447g9gg44665775ddf71444488773384ccccdffc.

Cute, right?

But according to Duffy, without this centralized control of the art, developers and players might abuse the privilege.

“What happens if someone uploads something illegal, like child pornography or something?” he said. “The nodes would have to have a way of censoring that to remove that data, or it would just be a complete free-for-all.”

And yet, CryptoKitties seems to be ready to take somewhat of a chance on this – on June 26 the company, now known as Axion Zen, announced that it had updated its terms of service, making it possible for third-party applications to use CryptoKitties art. And not only that but it was open-sourcing the ownership rights of the non-fungible tokens.

Still, it’s a far cry from complete decentralization, and Duffy acknowledged that there are potential pitfalls in CryptoKitties’ approach to its business model. But he said that launching a semi-centralized dapp and decentralizing it over time is “pragmatic.”

Kyle Samani, the managing partner of Multicoin Capital, echoed Duffy’s statements, saying, “Decentralization is generally a spectrum.” He called criticism of CryptoKitties’ centralized aspects “nit-picky.”

Duffy held out hope for more complete decentralization, though.

For instance, he argues that Loom Network’s approach – building a dedicated, scalable sidechain for each dapp and pegging that chain to ethereum – would enable full decentralization without having to settle for fossilized games that never add new levels or features. Updates could be made through hard forks, assuming players could come to a collective agreement.

Making a prediction, Duffy said:

“We’re going to see actual, real, fun games that are normal games that people want to play, except that they’re actually owning the in-game assets and they can do this on a fully decentralized platform.”

Order book blues

Centralized exchanges have been cryptocurrencies’ Achilles’ heel since the early days of bitcoin – MtGox being the most famous example of what can go wrong when transparent, decentralized ledgers meet opaque, centralized intermediaries.

For this reason, advocates of decentralization have long tried to build distributed alternatives. Examples on ethereum include Idex and ForkDelta, which according to DappRadar are the first- and second-most trafficked dapps over the past 24 hours.

The only problem is that both of these exchanges use centralized order books, as do most of their peers, according to Taariq Lewis, a veteran cryptocurrency developer who is building DEX technology – codenamed Lyra Protocols for now.

These centralized order books, which collect “bids” (prices offered by buyers) and “asks” (prices offered by sellers) to facilitate trades, are the norm in traditional markets.

Despite strict regulation, however, shenanigans abound on traditional exchanges. Spoofing, front-running and layering are just a few of the (illegal) tricks traders use to take advantage of each other, and this behavior is prevalent – if not worse – on crypto exchanges.

“Unregulated centralized order books are manipulation havens,” said Lewis.

A person familiar with DEX operations, who asked not to be named, added that some exchanges see order book decentralization as a way to avoid regulatory interventions. Exchanges operating centralized order books must either register as Alternative Trading Systems or avoid listing securities – which, as is becoming increasingly clear, many crypto tokens are.

Decentralizing order books, however, is anything but simple. Traders need a main order book that is visible to everyone, Lewis said, and ensuring that everyone sees the same bids and asks without a central intermediary is “an unsolved problem.”

He continued, “It’s not trivial. A lot of these things folks have been working on for decades, well before blockchain.”

Adding to these technical difficulties, Lewis said, decentralized order books can be easy targets for Sybil attacks – whereby one user or group of users creates hundreds if not thousands of identities in an effort to spam the network with information.

Still, exchanges such as Idex and ForkDelta have said they plan to decentralize their order books when the technology enables them to.

Lewis did not want to reveal too much about Lyra Protocols, but said the project was “looking into” attack-resistant, distributed order books. And Duffy said that a number of DEXs have reached out to Loom Network wanting to take advantage of dedicated sidechains for the purpose of decentralizing more of their processes.

As such, Duffy expressed confidence, saying:

“Give it a couple years and I’d say it’ll definitely be the case, just because it’s possible and if users demand it, then someone’s going to fill that demand.”

Chalk drawing image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Watch Out Crypto Exchanges, Decentralization Is Coming

Tom Goldenberg is a senior engineer at BCG Platinion | MAYA Design and founder of Blockchain Panel NYC. The views expressed here are his own.


Cryptocurrency exchanges operate in a fluctuating industry that is bracing for change.
With changes in regulation and customer sentiment rapidly shifting, it is anybody’s guess what will happen in the next two to five years.
Notably, a few big players – both centralized and custodial in nature – handle the bulk of trading volume for the $381 billion-worth of the world’s crypto assets.

Source: Coinhills.com

In general, we can classify exchanges into three groups:

  • Custodial exchanges
  • Non-custodial exchanges
  • Decentralized exchanges (DEXs)

Of these, both custodial and non-custodial exchanges are “centralized.” This means that orders are routed and executed by a closed, internal system. This is different from a “decentralized” exchange. In a decentralized exchange, smart contracts match and execute orders.

An estimated 99 percent of trading volume flows through centralized exchanges. About 73 percent of these exchanges are custodial. Custodial exchanges act as managers of their customers’ crypto wallets. The most popular crypto exchanges are all custodial — Coinbase, Bitfinex, Gemini, etc.

Custodial exchanges such as Coinbase manage user assets through an internal ledger. This ledger maps each customer with the coins he or she “owns.” Customers do not have direct access to the wallets where the exchange stores their assets. Only upon selling or transferring the assets does a user have control over them.

Concerns over custody

The most notable advantage of custodial exchanges is ease of use. A user can access any of their wallets by authenticating with a username and password. There is no need (or possibility) of securing a private key, an exercise that can prove tedious.

Yet, the centralized nature of these exchanges, along with the immature state of regulation, has provoked concerns. An estimated one out of every 16 bitcoin has been stolen. Once an attacker breaches a system and obtains the private keys to the exchange, all is lost. (Or rather, all that is not stored in “cold storage” and not connected to the internet. More exchanges have been making sure that a bulk of their reserves are not connected to the internet, providing an extra layer of protection).

This, in a nutshell, is what happened in the infamous Mt. Gox hack (’14), the hack of Bitfinex (’15), and the recent hack on CoinCheck (’18). Besides the long history of hacks, all exchanges face concerns over price manipulation, reflected in the recent probe by the Department of Justice.

  • In summary, here are the arguments for and against custodial exchanges:
    Pros: Familiar interface, easy fiat-to-crypto, and better customer support
    Cons: Target for hackers, high fees, and lack of privacy

The concerns over custodial exchanges have prompted many to push for the use of decentralized exchanges. Take this tweet from Vinny Lingham:

“I’m almost certain we will see a top 25 crypto exchange fail or be shut down in the coming months. This will be the catalyst for the emergence of decentralized exchanges and this is a key theme I’m expecting in 2018.”

Non-custodial exchanges

A non-custodial exchange is still centralized, but with a critical difference. It does not manage users’ wallets. Instead, it matches orders through an internal order book and takes a fee off of the top.

One of the most popular non-custodial exchanges is ShapeShift, founded by Eric Voorhees. As per Voorhees, the company averages $10 to $15 million in transaction volume and roughly 15,000 orders daily.

Non-custodial exchanges like ShapeShift, Evercoin, and Changelly offer users more security and privacy. But, they do not offer conversion from fiat currency to crypto. This has prompted several efforts to peg a cryptocurrency to the dollar.

Because non-custodial exchanges are still centralized, their internal mechanics are not transparent. One could argue that there is still the possibility for foul play. Additionally, non-custodial exchanges suffer from low liquidity, scaring away sophisticated investors.

Decentralized exchanges

This takes us to the state of decentralized exchanges (DEXs). Many in the crypto community are rooting for these to succeed.

“99% of cryptocurrency transactions still go through centralized exchanges; this trend is expected to be reversed in the coming years.” — Nathan Sexter, Consensys

After all, part of the appeal of cryptocurrencies is the idea of a decentralized internet — a platform where no single party controls the data. In that case, why do centralized platforms control the exchange of crypto assets? This is often referred to as a “dogfooding” problem, or not practicing what you preach.

There are several operating DEXs matching and executing orders via smart contracts.

The Waves DEX, for example, is currently handling about $6 million of daily trading volume. Others are still in the development or testing phases.

The chart below tracks fundraising by some of the players in the space, including companies like 0x, which is building a protocol for DEXs:

On paper, DEXs are a perfect solution for the concerns raised by centralized exchanges. They are fee-light or fee-less; they are transparent since the code can be inspected; they are more secure since you control your wallets.

But there are downsides to DEXs in their current state as well. Several of these mirror the challenges of non-custodial exchanges:

  • Inability to convert between fiat currency and crypto
  • Low liquidity
  • Less interoperability than non-custodial exchanges. Inter-chain trading (i.e. BTC to ETH) makes up 98% of all cryptocurrency trading, as per coinmarketcap.com, 2018. This doesn’t bode well for DEX’s which depend on a single chain for trading.

Let’s not forget that smart contracts are hackable, too. Take this quote from Jacob Woods:

“Although trusting a third party isn’t necessary, a lot of faith is put on the smart contract itself. Money can and has been stolen from decentralized exchanges despite the fact that many community members considered them unhackable.”

Hybrid exchanges

There is a general consensus in the crypto community that DEXs will take on a more prominent role. Even Coinbase’s head of communications, Megan Hernbroth, has this to say:

“Decentralized exchanges are complementary to and important for the development of the ecosystem by acting as a middle ground.”

It is also widely accepted that custodial exchanges have a role to play in crypto’s future. Eric Voorhees contends that for many people, custodial firms are more convenient.

“I expect the banks of the future to look a lot like Coinbase, and I say that as a compliment to Coinbase. Crypto gives everyone the option to hold their own money, which is great, but that doesn’t mean everyone should, nor that everyone will want to.”

There are also those who believe that the future of crypto will contain a hybrid of centralized and decentralized services.

Peter Smith, CEO of Blockchain, argues that allowing centralized exchanges to do what they are good at — support, compliance, and banking — while moving private keys back into the hands of customers, would “drive value for [the] entire industry.”

It seems inevitable that DEXs will continue to rise in popularity, but doubtful that they match the scale of custodial exchanges anytime soon. If customer awareness of privacy and security continues to grow, we may witness more custodial exchanges offering hybrid solutions as well.

With regulatory uncertainty looming over the industry, incumbents should not feel too comfortable at the top.

Exchange image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.