Not Your Keys, Not Your Crypto: Value of Non-Custodial Crypto Trading
Crypto trading isn’t news anymore to most in the finance industry today. With the recent boom in decentralized finance and rise in crypto prices led by Bitcoin, many traders and investors seem to be keen on getting on the train. Not wanting to miss out on opportunities made available for investments in the blockchain ecosystem.
However, for newcomers in the crypto space, the availability of so many exchanges and different services may be confusing and too technical to grasp. Especially when it comes to simply keeping one’s asset safe and secure.
There are currently over 300 cryptocurrency exchanges that provide trading venues for digital assets. However, it is important for traders to know that there is a significant difference between non-custodial and custodial exchange services. These two types of exchanges operate largely by the significant difference when it comes to asset custody.
What are Custodial Exchanges?
These are exchanges that typically take control of the trader’s funds and ensure its safety and security. Centralized exchanges make up for most of the custodial exchanges today. These exchanges provide custodial services like hot wallets where the user’s funds are stored and controlled by the exchange. However, in doing this, the trader has to relinquish full control of their crypto assets over to these exchanges including their private keys.
While this may appear to be safe, the exchange bears all the liability in terms of protecting the assets and there are major drawbacks to this. The cliche phrase “not your keys, not your crypto” perhaps spells it all when it comes to the risks involved with custodial exchanges. Traders do not have control over their funds, rather these exchanges have free access to them. The trader has no option than to trust that their asset is properly managed and made available when needed. So trusting the exchange is a huge factor to using centralized trading platforms.
There’s also a major challenge of crypto hacks and thefts. Custodial exchanges create a single point of failure that are commonly referred to as the “honeypot” for hackers. One single successful hack could have the trader lose all of their funds. This has been witnessed over the years with custodial exchanges losing hundreds of millions of dollars to hackers and scam artists. Last year in 2020, over $280 million of KuCoin exchange funds was compromised in a crypto hack. Crypto hacks cost the market US$1.8 billion in 2020 alone.
Challenges like these are why experts in the crypto space advise a different mode of exchange to help facilitate a better and more secure structure in the ecosystem.
Enter Non-Custodial Exchanges
Contrary to custodial exchanges, these exchanges do not assume control over the trader’s funds or assets. Instead, the traders have full ownership and control of their funds and are responsible for its security. This way, the trader does not need to hand over their private keys to any third-party service. These exchanges also do not have a single point of failure that are often associated with centralized exchanges, so the risk of hacks and thefts is drastically reduced.
While this means that the trader bears all the liability for their assets, crypto experts still strongly advise these exchanges are the way to go as they minimize security and trust risks to a very large extent. Non-custodial trading offers traders a greater level of security as there is no “honeypot” for hackers.
Traders on this platform do not need to deposit their funds as in the case of centralized exchanges, but rather keep their assets in their own user-controlled wallets. The vital point here is, the trader CONTROLS their assets rather than trusting a third-party to manage and store it for them.
CDzExchange aims to develop a non-custodial platform that gives owners full control over their assets and can have free access to them. Trading on the platform will be governed by smart contracts making them open and transparent.
Although centralized exchanges still remain very popular in crypto trading, the rise of DEXs and the growing liquidity already hint an imminent paradigm shift towards completely decentralized trading. Is the future of crypto trading going to be more decentralized? Well, the current growth metrics around DEXs are leaning towards that.
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