In an interview with Forbes, Sasha Ivanov, the of CEO Waves – a $200 million smart contracts blockchain and a blockchain infrastructure development firm Vostok, said that ‘decentralized crypto exchanges are capable of competing against centralized trading platforms and eliminate fake volumes from the global market.’ This means that the exchange risks associated with cryptocurrency can be eliminated by decentralization as opposed to market regulation or intervention. He said:
In concept, decentralized exchanges have an edge over centralized platforms in every imaginable aspect; security, transparency, and liquidity. (As Coinbase co-founder and former Goldman Sachs executive Fred Ehrsam explained), because decentralized exchanges can share a pool of liquidity on exchange protocols, they can have significantly more liquidity than centralized platforms.
Over the short age of cryptocurrencies, the issue of fake volumes has been a predominant one. This can contribute to a highly volatile crypto bubble, similar to the housing market crash in 2008. The inflation of fake volumes shows wrongfully calculated results.
However, decentralized exchanges have the potential and the ability to successfully eliminate this problem from the crypto networks. False imagery and theatrics can be tackled once and for all, if investors and traders resort to decentralized cryptocurrency exchanges (DEX).
Last month, Changpeng Zhao, the CEO of the biggest centralized cryptocurrency exchange Binance, shared an analysis of fake volumes created by leading trading platforms. This is a method to flatter the performance of a particular currency or the exchange itself as make users to believe the uncritical and biased representation of the firm. He explicitly described the dishonest methods employed by market leaders to inflate their volumes and market shares. Zhao said:
They are definitely questionable volumes if you look at a lot of the candlestick charts from many different exchanges when the price is moving significantly.
What exchanges do is they inflate their sale volume by double counting, making it look more desirable and trying to show the numbers in a radiant light. He went on to explaining:
Basically, if I buy one Bitcoin from you, some of the exchanges count this trading volume as two Bitcoins, because one is sold and one is bought.
We always report it as one. In a lot of ways, we actually report only 50 percent of the volume.
Various business models are used to manipulate the volumes among other smaller tricks and tactics that help exchanges climb up the hierarchy inorganically fast. For example, Zhao explains:
Many exchanges have put requirements on the listing on the coin project team that they must guarantee a certain trading volume.
The listing team will hire some guy (who they call a market maker), who will just generate tons of volume. The guy in reality basically creates two accounts who just trade against each other.
Double counting and false trading both are ways to boost the performance in terms of volume exchanged or the number of times the money changed hands in the day.
Researchers at CER, a cryptocurrency research group, investigated BitForex, FCoin, and CoinEx. These are three trading platforms that managed to climb up the rankings to become top 10 cryptocurrency exchanges within months since their debut.
The researchers explored that the three trading platform’s social media engagement, website traffic, and overall demand, comparing them to Kraken and UPBit, the industry’s most trusted cryptocurrency exchanges. CER researchers said:
Considering our analysis results, it’s evident that BitForex is likely pumping its trade volume using wash trade, the most common means available. While it can be carried out in different ways, wash trade typically uses large transactions/trading orders to reduce the risk of loss. This practice is consistent with the analysis results that we’ve received and served as additional proof of BitForex’s volume manipulation activity,
The only issue that remains in the adoption of decentralised exchanges today is that they are publicly accessible. As and when this is overcome, the move away from centralized to decentralized is unstoppable. Currently, many people who could not care less about their account information being open to all and privacy concerns, are already on the system enjoying its benefits. However, this does not mean that the centralized ones will go out of business, Ivanov said:
In the near future, we will see the total victory of decentralized exchanges but at the same time, there is going to be some interaction between centralized exchanges and decentralized exchanges,”