What is a Non-Custodial Exchange?
Tags: Crypto Exchange, Non Custodial, Cryptocurrency, Decentralized Exchange, Atomic Swap

Our previous article, we discussed the concept of crypto custody, and why it is so critical that anyone buying or trading cryptocurrency understands it. In this article, we will explore the rise of non-custodial exchanges, how they have influenced the industry and what it means for the future of cryptocurrency.

What is a Non-Custodial Exchange?

“Non-custodial exchange” is a broad term used to describe crypto websites and tools that allow customers to trade cryptocurrency without taking custody of their funds. Unlike a centralized exchange, these services do not create hot wallets for their customers. Instead, users must manually enter their deposit and receiving addresses in order to swap one cryptocurrency for another. Some non-custodial exchanges allow users to directly connect their both software and hardware wallets.

The advantages of using a non-custodial exchange are clear. Essentially, it allows customers to bypass the onerous process of making an account and just start swapping right away (although some services like ShapeShift do require users to create an account.) There is also less risk of losing funds since there is no user hot wallet for hackers to attack.

Having said that, sometimes non-custodial services are not what they appear to be.

Appearances Can Be Deceiving…

While it may sound like some of these companies are great alternatives. When you dig a little deeper, you’ll realize most of these no-custodial services aren’t really addressing the main problem of centralization.

To understand why, it’s important to take a look at the internet, which has followed a similar evolutionary path to cryptocurrency.

The original vision of the internet was a global decentralized peer to peer network for communicating and sharing information. But it wasn’t exactly fast or easy to use back in the early 90s when it became available to the public.

It wasn’t until big companies like America Online and Google emerged that the internet became part of mainstream society and completely changed the economy and our way of life. But it came at a price: as the internet became easier to access and use, it became more and more centralized. Today, a small number of massive tech companies essentially control most of the physical and digital infrastructure of the internet, and gather data on almost everyone.

When people trade freedom for convenience, the result is ever-increasing centralization.

Something similar happened with cryptocurrency. Back in 2009 when bitcoin launched, it was almost entirely decentralized and peer to peer, with individuals meeting in person to make trades. Obviously this is only practical up to a point, so centralized exchanges offering order books matching buyers and sellers began to appear.

These centralized exchanges were more convenient, but came with their own set of security risks. The massive theft of cryptocurrency from the Mt.Gox exchange was an early warning of what was to come, but few heeded it. At the time, cryptocurrency was just too much of a niche thing for most people to pay attention.

In 2017, cryptocurrency finally entered the mainstream, and now, we’re in the same place as the internet. Huge centralized companies offer convenient on-ramps for people to enter the cryptocurrency world, but with more and more exchange hacks, people began looking for alternatives.

Some non-custodial exchanges appear to offer a solution, but these services are not always what they appear to be on the surface. Most of them draw liquidity from centralized exchanges. Essentially, they are front end products for centralized exchanges, making the “decentralization” they offer a mirage. While there is generally less of a security risk with these services, the underlying issue of massive centralization remains.

Do Atomic Swaps Offer a Solution?

There was hope that cross-chain atomic swapping could provide truly decentralized swapping for all crypto assets, regardless of what blockchain they were built on. But atomic swaps have yet to reach any sort of critical mass due to numerous technical hurdles, as well as the underlying issue of connecting buyers and sellers. This is inherently a market problem more than a technical one.

Despite their numerous issues, centralized exchanges do this well, and they have order books to provide accurate information on prices, depth of trade and more. Atomic swapping isn’t really a feasible alternative until it can do this as well as a centralized exchange, and in a user-friendly way.

The Way Ahead

Right now, cryptocurrency is in a sort of adolescent stage of its development. In order for cryptocurrency to truly succeed and reach its full potential, what is needed is a solution that combines the convenience of centralization with the security and freedom of non-custodial trading.

In our next article, we’ll reveal a new idea that could finally reconcile these conflicting visions of what cryptocurrency can and should be.

In the meantime, connect your wallet to Faast and so you can swap coins, visualize your holdings and manage your portfolio all in once place. Visit the Faast website now to get started in seconds.