PROBLEMS WITH CENTRALIZED EXCHANGES
SECURITY
An immediate disadvantage when using a centralized exchange is the security risks arising from the
centralization of funds. As all funds sent in by users for trading are stored and secured by the exchange,
the funds are prone to a single point of failure. For example, the exchange servers could be breached by
attackers, or the exchange’s wallet private keys could be lost, resulting in a loss of funds.
These failures are completely out of the control of the individual user, regardless of how secure their
passwords are, and they have to trust that the centralized exchange have done what is necessary to secure their funds. There have been major breaches of users’ trust, evidenced in past exchange hacks which have amounted to billions of dollars in value lost over the last few years. A prime example of this would be the USD 500 million lost in the recent Coincheck breach. Decentralized exchanges solve this problem by letting the blockchain and the user handle the security of funds from start to end. A DEX is therefore as secure as its smart contract, and most existing DEXs have been running for a long time with no core breaches (e.g. EtherDelta).
CONTROL OF FUNDS
When users deposit their funds into a centralized exchange, their funds are under the control of the
exchange. The exchange may be able to withhold funds from users[3] or remove funds from users’
accounts[4] at any time. In general, a user has to trust that a centralized exchange will always act in good faith for the user. This is in contrast to cryptocurrency’s spirit of decentralization and trustlessness.
EASE OF TRANSFER
Users may also be unable to withdraw assets in small numbers from centralized exchanges, or it may
not be viable to withdraw often due to high withdrawal fees. This hurts the user’s security even further as they are at the mercy of the centralized exchange while their funds remain there. Furthermore, a high
number of confirmations are typically required when depositing funds. These issues make trading on
centralized exchange a hassle — moving funds from a wallet to an exchange to trade and then back is
generally slow and tedious and subject to unanticipated delays.
As all exchange interactions for Switcheo are done via a smart contract (i.e. code on the blockchain), users can buy or sell tokens directly from their wallet, without additional transfers. Users can also withdraw any amount of tokens from their balance at any time, and this is guaranteed by the code of the smart contract. When not actively trading, users’ funds are always secured by the same mechanism - their own wallet contract, or Switcheo’s smart contract.
IMMEDIATE LISTING
A big issue with the acquisition of tokens of an early stage blockchain startup is finding exchanges that list the wanted tokens. On the other hand, users who have purchased tokens during an Initial Coin Offering (ICO) also have to wait for the token to be listed on an exchange before being able to sell it. This leaves many users stuck with the token even though they may no longer want it.
With the increasing popularity of projects developed on the NEO Blockchain, Switcheo will strategically
start trading NEP-5 Token contracts for the NEO Blockchain first, before moving on to QRC20 Tokens
(QTUM). Using the dynamic call functionality of the NEO blockchain, users will be able to list and buy
tokens the moment they are available for transfer on the blockchain.
EXCHANGE FEES
While centralized exchanges like Binance and Gate.io charge exorbitant rates for withdrawals for small
amounts of cryptocurrencies, there will be no withdrawal fee for Switcheo’s smart contract. Users will
only pay the standard network fees, and not be charged additional amounts should they decide to withdraw their balance. The maker and taker fee for Switcheo is capped at 0.5%, and is guaranteed by the smart contract.
PROBLEMS WITH EXISTING DECENTRALIZED EXCHANGES
While a DEX has clear advantages over a centralised exchange in the security & control of funds, ease of
transfer, immediate token listing, and lower fees, Switcheo’s true priority is to overcome the shortfalls
of existing DEXs.
USER EXPERIENCE
Order mistakes, wrong trades and mis-clicks are the hallmarks of current DEXs. While a true DEX will
inherently have different performance characteristics from a centralized exchange, we believe this problem can be overcome by a well-thought-out UI & UX. Switcheo’s DEX will allow for partial filling of offers, auto-retrying of failed orders, and order batching within a single transaction. This provides the user the experience of using a traditional exchange while allowing them to remain in control of their funds through the Switcheo smart contract. Exchange of Tokens is done without delegating any key component (such as order matching) to an off-chain service where unseen shenanigans that compromise the integrity of the entire exchange may happen.
SMART CONTRACT SECURITY
As the security of a DEX is only as good as the security of its smart contract, we hope to run an aggressive bug bounty campaign over a minimum of 1 week on top of external audits, to minimize the possibility of any critical bugs in our smart contract. More details on this will be announced soon.
KYC / AML REQUIREMENTS
Many governments have KYC/AML laws and requirements, in addition to regulations for the trading of
securities. We aim to implement D-KYC whitelists on our exchange so that users can trade on our
exchange in compliance with the relevant legislations. Furthermore, we intend to monitor transactions on the Switcheo DEX for suspicious transactions, such that we can assist legal authorities in tracing and/or tracking illegal activities conducted through the blockchain.
LOW EXCHANGE VOLUME
We hope to overcome the problem of low liquidity / exchange volume through strong credibility, market
presence and a state-of-the-art ease-of-use platform, such that using Switcheo’s user experience is
preferred even to popular centralized exchanges.