Centralized vs Decentralized Exchange

Trade is a primary component in our everyday lives. We trade our bills for bags of groceries, the change we trade for a ride on a train or a bus, the leftover coins we trade for a quick snack on the street; and when our wallets are once again replenished with crisp bills, the cycle continues but this time we trade some of them for indulgence in the form of a new pair of shoes or an expensive pair of noise cancelling headphones. We use trade for both our survival and pleasure; it is basically a way of living which is why it does not come as a surprise that even trade itself is now considered a commodity.

This is where a third body enters the picture. While trade is primarily understood as an exchange between two consenting individuals, a third body, usually in the form of an institution such as a bank, acts as a central and mitigating body during the transaction. The presence of a mediator makes the transaction a centralized exchange; meaning, the central body legitimates the transaction and in return, the transacting individuals pay for their efficiency. As Berentsen and Schär (2018) posits in their “A Short Introduction to the World of Cryptocurrencies,” it is a connection which is built on trust: “Agents must trust that the central authority does not misuse the delegated power and that it maintains the books correctly in any state of the world – that is, the banker is not running away with the money”

In the emerging realm of cryptocurrency, the erasure of a mediator is enforced; hence, the time and cost (namely, the fee being paid to the mediator) are exponentially reduced and the exchange is now decentralized. Perhaps the initial concern towards this arrangement lies in the removal of an entity which would legitimize the transaction and enforce trust between the two parties. This is where the blockchain becomes useful since it replaces the mediator as the provider of trust. A blockchain is a series of linked boxes of information wherein data is stored and safeguarded, and most importantly, it is barred from alteration. Moreover, the blockchain system has multiple storage of its information, making it an infallible ledger against potential security hazards.

Cryptocurrency is a continuous growing science which imparts not only excitement but also fear in the minds of the consumers. Perhaps most would opt to continue being loyal enthusiasts of centralized exchange because of its traditional simplicity and surefire security; however, one must also realize that cryptocurrency is geared towards granting the people a power of their own. By decentralizing exchange, the people would be allowed to hold all the reigns over their possessions; a great feat for human rights, if you ask me.

REFERENCE(S):

Berentsen, A. & Schär, F. (2018). A Short Introduction to the World of Cryptocurrencies. Federal Reserve Bank of St. Louis Review, 100(1), 1-16. https://doi.org/10.20955/r.2018.1-16