Crypto Exchange Of The Future

By February 14, 2018 No Comments

Could It Really Be That Easy?

It may seem like an implausible fantasy - imagine swapping any coin for any other instantly, with anyone anywhere, across the coffee shop or around the globe, friend or stranger - no trusted intermediary required.  That's the promise of cross-chain atomic swaps.

Judging from the buzz at The North American Bitcoin Conference in Miami last month, and from the recent headlines that highlight ongoing problems with centralized exchanges - this is definitely a thing for 2018, and it's not going away.

In fact, looking at the Forbes Fintech 50 and zooming in on the exchange sector, we can identify several trends that give us a jump as investors in the future of cryptocurrency exchanges.

Big Picture

Analyzing the focus of the mainstream media gives a broader perspective to crypto-investors who want to avoid getting stuck in our own little down-the-rabbit-hole, through-the-looking-glass-world.  This year's Forbes Fintech 50 includes nine crypto-startups, which we divided into sectors.

Two exchanges made the list - Coinbase and Shapeshift.  Each one of these has some unique characteristics that can give us an indication of the future direction of the cryptocurrency exchange sector.

Crypto 101

Getting listed on Coinbase is a big deal.  Its laser focus on trust and ease-of use has paid off big-time.  It is by far the easiest on-ramp for crypto-newbies, has amassed over 10 million users, and recently passed $1 billion in revenue for 2017.  CEO & cofounder Brian Armstrong is on Forbes' list of the richest people in cryptocurrency.

Check out what happened to the price of bitcoin cash (BCH) after it was listed for the first time on Coinbase on Dec. 19th.

The Problem

The problem is obvious: as exchanges grow bigger and more centralized, they essentially become billion-dollar bug bounties for hackers, who are prone to follow Sutton's law and go where the money is.

The recent hack of the Japanese exchange Coincheck - the largest heist in history - is a case in point.  When an exchange is responsible for the security protecting investors' private keys (the secret codes that allow individuals to prove they own a public address and all the transactions it receives), the exchange may not take the same meticulous precautions that each individual would take to protect their own key.

The same circumstances resulted in the infamous MtGox hack, which involved the simple copying of a single wallet.dat file.  The stolen private keys allowed hackers to withdraw funds from accounts over a period of several years, with losses estimated at $450 million.

Not Just Hackers

Sloppy code may have been responsible for the loss of $170 million of Nano by the exchange Bitgrail last week, and such events are not at all uncommon.

SEC chairman Jay Clayton clarified the issue in a Senate subcommittee hearing on Feb. 6th, reiterating that there is almost nothing federal regulators can do to help an investor who has lost funds stored on an unregulated offshore exchange.

Lossless Hack

Here's a cool fact - the other exchange that made Forbes Fintech 50, Shapeshift, was also hacked, but no crypto was lost because the exchange doesn't actually store any customer funds.

In their writeup, Forbes noted that Shapeshift is a disruptive threat to conventional cryptocurrency exchanges, noting the most effective security feature of all - staying completely off hackers' radars by not storing any customer funds.


With this unconventional approach, Shapeshift elides the biggest security risk, and also excels in the ease-of-use category since no wallet or account setup is necessary.  Since no funds are held or stored, customers have immediate access to their altcoins.  These advantages accrue on top of the obvious privacy benefits of not linking to any banks or dealing in fiat currency.

But it's not truly decentralized, since you still have to trust Shapeshift to execute your transaction in a timely fashion for a reasonable fee at a fair rate of exchange - or to refund your altcoins if the transaction fails.

Combining these 2 important features - ease of use and security - leads us right back to the trading platforms that were such a hot topic at TNABC Miami last month - decentralized ones using cross-chain atomic swaps.

lightning network screenshot

The lightning network opens private channels between b​​lockchains. There is no need for an intermediary or trust between parties since a special "hashed time-locked contract" ensures that everyone lives up to their side of the bargain.

Private Channels, Special Smart Contracts

Right now transactions are confined to their own blockchain.  That's why an altcoin-to-altcoin trade can be so cumbersome, time-consuming, expensive, and even dangerous.  But think outside the blockchain for a minute.  What if cross-blockchain transactions were as seamless and even quicker and cheaper than on-chain transactions.  That's the promise of atomic swaps.

An atomic swap is executed through a private channel, between blockchains, and governed by a special type of smart contract, called an HTLC (hashed, time-locked, contract) - encoded and timed so there is no need for trust between the parties - the HTLC ensures that everyone lives up to their side of the bargain.

Coming Soon

Conventional exchanges have serious issues, making them ripe for disruption by creative technical innovators.  All the buzz around cross-chain atomic swaps and decentralized trading platforms suggests that they may be the wave of the crypto-trading future, and they're coming soon.


By clicking Subscribe you agree to the following: Privacy Policy, and Terms & Conditions.