Centralized vs Decentralized Cryptocurrency Exchanges: Vulnerability of Most Trading Platforms

Billions of dollars are traded on major cryptocurrency exchanges like Binance, Huobi, Bithumb, and OKEx on a daily basis, and users tend to prefer these exchanges over other platforms in the market due to their high liquidity.

Binance for instance, the world’s largest cryptocurrency exchange, settles more than $1.8 billion worth of cryptocurrency trades per day, and it is processing $370 million worth of bitcoin trades alone.

But, in order to trade on these platforms with reasonable trading limits and flexibility, users are required to undergo a rigorous Know Your Customer (KYC) and Anti-Money Laundering (AML) verification process, during which users have to submit relevant government-issued documents like passports, carry out face-to-face interviews, and provide bank documents.


For cryptocurrency-only exchanges like Binance and Huobi, KYC and AML requirements for users are significantly less strict in comparison fiat-to-cryptocurrency exchanges. Still, to withdraw relatively large amounts of bitcoin or any other cryptocurrency like Waves, users need to be KYC and AML compliant.

As instant cryptocurrency exchange ShapeShift CEO Erik Voorhees stated before, KYC and AML systems can leave centralized platforms vulnerable to data thefts and hacking attacks, especially if exchanges store sensitive information such as passport data, banking documents, social security numbers, and more.

In June 2015, Voorhees boldly decided to leave a big cryptocurrency market in New York due to the BitLicense, a licensing program for cryptocurrency-related businesses that enforces strict KYC and AML regulations.

“It would maybe be a different story if, you know, companies and governments were able to retain secure records of things. But just last week, there were 4 million accounts [compromised] on several computers – it’s every couple of weeks there’s a big data breach somewhere,” Voorhees said at the time.

Waves Decentralized Exchange

Large-scale decentralized exchanges like the Waves Decentralized Exchange (DEX) that is built into the Waves blockchain protocol essentially allow users to remain in full control of their funds, information, and sensitive data, while still providing sufficient liquidity.

Already, DEX of Waves is processing nearly $700,000 worth of cryptocurrency trades per day. Although the daily trading volume of decentralized exchanges like Waves DEX are low as of current, as cryptocurrency users develop awareness of security and blockchain networks scale better to handle millions of trades on a daily basis, the volume of decentralized trading platforms will naturally increase.

Fred Ehrsam, the co-founder of Coinbase, previously emphasized the importance of decentralized exchanges in terms of security and financial independence. Due to their ability to allow users to possess all relevant information such as private keys and funds, decentralized exchanges eliminate the possibility of hacking attacks. Even if the network is compromised, users can easily retain their funds through their private keys.

“There are a few obvious benefits to decentralized exchanges. First, they allow you to remain in control of your funds. So no risk of the exchange being hacked or going insolvent. This can lead to higher liquidity, as users may be willing to leave orders open on the orderbook for longer when counterparty risk is gone,” Ehrsam wrote.

After several hacking attacks on cryptocurrency exchanges including South Korea’s largest trading platform Bithumb and leading Japanese exchange Coincheck occured, the demand for decentralized exchanges has increased. In the long-term, as cryptocurrency users develop more awareness of security and privacy, the adoption of decentralized exchanges like the Waves DEX will inevitably increase exponentially.