In the early days of Bitcoin, the service provided by an exchange was very basic. It enabled you to buy and sell Bitcoins, with the US dollar serving as the primary medium of exchange.
Over time, the list of services available on exchanges has grown. It is now common for an exchange to provide niche services such as a crypto-enabled debit card that can be used in stores that accept mainstream payment rails via networks such as Visa, Mastercard, and Union Pay.
Aside from Bitcoin, over ten thousand digital assets have been minted on various blockchains.
Despite this expansion, you must still deal with a few annoyances as an exchange user. Some have been outstanding since their inception, while others have emerged over time.
The following are seven of the most common pain points (and their solutions) that you are likely to encounter on most exchanges:
1. Security Concerns
According to a report by the blockchain research company Chainalysis, approximately US$3.8 billion was lost to hackers in 2022. A significant portion of that was stolen from exchanges. Notably, Binance lost approximately US$570 million and FTX US$477 million.
While 2022 saw the most amount ever of crypto assets stolen in history, no year has gone by without at least one exchange losing crypto assets worth tens of millions of dollars.
There have also been numerous instances where those in charge of the exchanges have proven to be untrustworthy. For example, it is suspected that Mt Gox, FTX and the Canadian exchange QuadrigaCX were involved in collisions that resulted in losses of billions of dollars worth of crypto assets.
The primary vulnerability of exchanges stems from storing large amounts of crypto in hot wallets, which are easier to hack remotely than cold storage wallets.
Meanwhile, entrusting your funds to third parties is a problem that Bitcoin was able to solve. Cryptocurrency is intended to enable individuals to safeguard their assets without relying on or trusting others.
How can you mitigate risks on exchanges?
As a user, the first line of defence should be to keep only what you need to trade on an exchange, and only for as short a time as possible. After completing a transaction, you should transfer your funds to a wallet that you control. This is true for both cryptocurrencies and fiat money.
Initially, traders had little control over the fiat once it was sent to the exchange, especially since ‘wiring/transferring’ took time and often cost a lot of money.
However, with the adoption and use of stablecoins, dollar-backed tokens on blockchains such as Stellar and Ethereum, you can move the funds required to purchase digital assets almost instantly. That means you do not need to wire funds ahead of time in anticipation of trading later and risk exposing yourself to the exchange’s flaws.
There are also decentralised exchanges (DEX) designed not to avoid single points of failure. They are built as smart contracts that run on blockchains such as Stellar and Ethereum. The DEXes also give the trader more control over the entire process of converting from one asset to another because the funds and the digital assets are always under their full control.
Centralised exchanges have leveraged the adoption of two-factor authentication and cold storage is also becoming more popular.
2. Fiat Payment challenges
This problem has existed since the early days of Bitcoin. Indeed, finding a payment method that allows you to easily move dollars to an exchange when you need to trade has always been difficult.
Where it has been possible, it has frequently taken days for the money to be available for trading. Meanwhile, even a few minutes of waiting in the cryptocurrency markets can result in massive losses.
What are some examples of how payments have improved?
Stablecoins are the one innovation that has changed the way fiat payments are made on exchanges. They have made it much easier to move your purchases into and out of exchanges.
Transactions involving stablecoins are often completed in seconds. This allows traders to act quickly and capitalise on momentary fluctuation opportunities in price changes. Stablecoins also allows traders to access a broader market, particularly to leverage arbitrage. That is because, like cryptocurrency, stablecoins can be sent anywhere.
Stablecoins are also finding uses in other fields. For example, they improve trade financing efficiency and make remittances cheaper and faster.
For a long time, the only stablecoins available were those registered in the United States (US) and backed by the US dollar. Novatti is one of the first companies to issue stablecoins backed by other fiat currencies, specifically the Australian dollar. Novatti’s AUDD stablecoin is (currently) minted on the Stellar blockchain, allowing users to make payments and trade with other Stellar-based digital assets through its on-chain decentralised exchange.
Furthermore, AUDD is incorporating Stellar’s protocols that will enable businesses to easily integrate Stellar-supported services, such as cross-border payments and on/off ramps.
3. Lack of liquidity
Lack of liquidity refers to an exchange’s inability to complete transactions due to inadequate supply of the digital assets it supports. While attempting to sell or convert from one asset to another, you might not get enough of what you want or have to wait a long time to sell or convert from one asset to another.
Low liquidity not only makes transactions difficult, but also leads to high slippage, which is the change in the rate indicated after a trade has already been initiated. It also causes significant price volatility.
Decentralised exchanges frequently experience liquidity issues, which result in failed transactions.
Improving the incentives given to liquidity providers on DEXes is one of the steps being taken to change this situation.. Additionally, project founders can provide incentives outside of DEX smart contracts, such as establishing a fund from which liquidity providers can receive grants.
4. Market manipulation
Pump-and-dump or rug pool schemes are becoming more common as more assets are made available in the market. Such schemes’ strategies involve project founders or traders engaging in deceptive marketing activities.
The primary goal is to portray a specific crypto asset as having high potential. In reality, that asset may be worthless other than as a speculative tool.
The marketing raises the price of the assets on exchanges. When the price reaches a certain level, the holders, who are often project founders and early adopters, sell and then profit greatly. The sell-off can cause price drops, leaving many people holding worthless digital tokens.
The solution is for you as an investor to purchase new assets on exchanges that thoroughly vet the assets before listing them. It is also critical that you develop the ability to assess the viability of assets, particularly understanding the solutions the project provides.
5. Customer user experience and support
Most centralised exchanges still struggle to provide adequate and timely customer support.. This is especially important on P2P networks, where disputes frequently arise and must be resolved quickly.
There is also the technical issue to consider. Some exchanges, particularly decentralised ones, may require you to have technical skills to perform functions like generating wallets, connecting to the marketplaces and identifying genuine assets.
User interfaces are improving over time, and blockchains are establishing standards and bridges to make assets management easier, including across blockchains.
6. Lack of crypto pairs
With a growing number of assets available, exchanges frequently struggle to keep up with onboarding and supporting new assets. This can make purchasing assets you’ve identified as having high growth potential difficult.
The most practical solution to this problem is decentralised exchanges. While centralised exchanges have limited processes for listing and pairing assets, DEXes give project founders more control.
The project’s creators can easily list their assets and facilitate the establishment of as many pairings as the market requires. This is accomplished by incentivising liquidity providers to form pools with fees, interests, and even grants.
Adoption of stablecoins such as AUDD also contributes to the resolution of this issue. While actual dollars cannot be traded on DEXes due to their inability to be programmed, stablecoins are ideal and can provide even more benefits. That includes fast settlements, low fees and security.
7. High trading and withdrawal fees
High fees are one of the most common complaints among exchange users. Commission and withdrawal fees are among those that traders are expected to pay.
Decentralised exchanges provide a mechanism for lowering this cost because such decentralised exchanges are frequently not corporations with shareholders looking to make huge profits.
Stablecoins are also a tool that can help users avoid large fees because they do not have to go through many processing entities, each with their own set of costs, which are frequently duplicated, and the need to earn profits.
The challenges faced within exchanges may continue to expand as the crypto market matures. Fortunately, industry players are developing new solutions to overcome these problems.
The information in this blog is
- provided for informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose;
- not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice; and
- general in nature and is not specific to you or anyone else.
You should not make any decision, financial, investment, trading or otherwise, based on any of the information presented in this blog without undertaking independent due diligence and consultation with a professional broker or financial advisory and you understand that you are using any and all information available in this blog at your own risk.
RISK STATEMENT – the trading of cryptocurrencies/cryptoassets has potential rewards, and it also has potential risks involved. Trading may not be suitable for all people. Anyone wishing to invest should seek his or her own independent financial or professional advice