The Office of the New York State Attorney General (OAG) recently published a report on cryptocurrency trading designed to give consumers information about how different platforms operate. Nine crypto trading platforms participated in the study on which the report was based, all of which provide services in New York state. The report’s a really interesting read, though, for anyone wanting to understand what’s at stake when trading on crypto platforms.
However, it only considers centralized exchanges so here I’d like to briefly discuss its key findings from the point of view of a decentralized environment and apply some of them to the decentralized exchange platform we’re building at OAX Foundation. I’ll take each of the report’s sections in turn. If you’d like to read the full report for yourself, you can find it here.
Section 1: Jurisdiction, Acceptance of Currencies and Fees
Much of this section applies to decentralized exchanges, apart from where it raises the possibility that customers could lose funds in the event of a dispute with their trading platform. In a decentralized environment, jurisdictional rules still apply but the risk of losing funds to a platform is removed because the platform no longer holds the customers’ funds.
Section 2: Trading Policies and Market Fairness
This section discusses how exchanges often offer special trade orders or co-location options to professional traders and how that might be unfair to normal retail traders. This isn’t an issue that decentralized exchanges are looking to address, but because the OAX platform will be open source, it will at least provide users the comfort of transparency because order types will be open for everyone to see.
When it comes to policies to prevent market manipulation and abusive trading, the OAX platform has built in voting mechanisms to tackle the issue. These allow members to decide as a community how to deal with traders perceived to be manipulating the market.
Section 3: Managing Conflicts of Interest
Section 3 is interesting as it raises the issue of how to deal with questionable practices surrounding the listing of coins on exchanges. On the OAX platform, all applications to list a token will be put to the community, meaning the process is fully transparent. The ultimate decision to list a new coin will rest in the hands of the voting members.
While industry guidelines and expert advice exist to help members decide whether to list a coin, we’re not planning any set standards for this on the OAX platform. This is by design as we believe the community will do the best thing for the platform. Voting is public and fully transparent meaning members’ actions will be critiqued by the public, providing a strong incentive to act in good faith.
Section 4: Security, Insurance, and Protecting Consumer Funds
This is where decentralized exchanges shine. They enable consumers to trade without having to send their coins to the exchange operators. Coins are held in the traders’ own private wallets meaning the risk of exchanges getting hacked or running off with customers’ funds is removed.
That said, it would be irresponsible of me to give the impression that hacking is no longer a danger in a decentralized environment. Hacking is and always will be a risk and so users still need to take caution. Centralized exchanges store all of their users’ coins in a central location, giving hackers one target for a potentially huge payday. If users store their coins in their own private wallets, a hacker would have to hack lots of computers for the same payoff.
Section 5: Access to Customer Funds, Suspensions, and Outages
This section discusses the problem of exchange users losing access to their funds due to trading suspensions or outages. In a decentralized environment, this issue no longer poses a threat as customers are always in control of their own coins.
In summary, many of the issues and concerns raised in the OAG report are not applicable in a decentralized environment. In fact, decentralized exchanges can be said to solve many of the issues currently inherent in the centralized model. But a decentralized exchange is not the solution to all problems. In particular, the risk of having funds stolen through hacking still exists.
Reports like this one are important in bringing to the public’s attention the benefits and challenges of crypto trading, helping consumers make informed decisions. At OAX Foundation, we see this as central to making crypto trading safe and accessible, alongside the sort of transparency and strong governance standards we’re building into our platform.
To learn more about OAX Foundation and our decentralized exchange platform (DEX), and how it can help you and your project, please get in touch with us at [email protected] or follow us on any of our social media channels.