What blockchain is and what it isn’t

The ‘blockchain’ word has been in popular use since 2017 and it has come to mean anything from the technology that will change to world to a digital form of snake oil. It was also going to make every investor in it very rich.

Part of the blockchain legend has been based on all the hype around cryptocurrencies, and it is fair to say that its powers have been inflated to the point where some people have come to believe it is capable of delivering things that it most likely can’t. After all, it is just a database with new features.

Jack Dossman writes at Hackernoon defines it thus: “It allows multiple parties to record and share information on a database in real time, and not need to trust each other, as they are incentivised to do the right thing through tokens/coins.”

As he says, blockchain has a certain specificity that only makes it useful in certain circumstances. It’s great for cryptocurrencies and for faster, cheaper cross-border payments services, but it isn’t a solution for absolutely everything.

It has some flaws: for example, the proof-of-work mechanism uses extraordinary amounts of electricity. But, we must also remember that we are still in the early days of blockchain and to dismiss it now would be the equivalent of saying in 1995 that the Internet would never work.

It isn’t a ponzi scheme and it isn’t a way of making a company’s share price rocket simply by adding ‘blockcian’ to a company name; especially when there is no blockchain involved. Neither is it a tool exclusively used by scammers as some would like you to think. That’s just a side effect of the technology, not its ultimate purpose. Plenty of scammers use email and social media channels, but that doesn’t stop us from using the Internet.

It won’t revolutionise you business, unless your company really needs blockchain technology to grow — so don’t add it in just for the sake of it. Plus, you’ve probably heard that it’s a ‘disruptor’; well, it probably won’t disrupt every industry sector, because it isn’t needed everywhere.

So what is blockchain?

It is technology that provides:

· A shared, add-only database

· Removes need for intermediaries

· It’s trustless

· It offers consensus and validation

This makes it perfect for cryptocurrencies and the finance world. There may be other mass-market cases for blockchain use that will come to light in the future, but just don’t believe absolutely everything you hear about what blockchain can do.

Trust your gut when trading crypto

As with just about everything else, the Internet offers a mountain of advice about trading cryptocurrency. There are trading experts with their own websites, YouTube channels where you can pick up tips in and plenty of other ways in which you’ll be bombarded with ideas if you do a Google search that says something like ‘How to trade crytpocurrency’.

You might find yourself following one or two of these ‘experts’, which may also mean you follow their trade strategies and this makes you feel safer and more expert yourself. But, is this rally the best way to go about it? In my experience it’s the wrong way, because it doesn’t encourage people to rely on their gut feelings and their personal view of the market.

By listening to your gut, I don’t mean basing your decisions on emotions. It’s not a case of waking up and thinking, ‘I feel good today, I think I’ll buy some bitcoin, sell some ethereum’; it is about using your intuition.

Analysing the market, which is extremely complex, will never bring you to the perfect trading sweet spot. Looking for patterns to base your trades on will eventually become self-defeating. Instead, simply gain experience and while you are doing that, your subconscious mind is storing away knowledge about the patterns that provide you with good results. Your intuition has access to this knowledge, whereas your conscious mind is blocked from directly accessing the subconscious.

But, using your intuition requires practice. Therefore, do trades on your own using your strategy, not one that has come from an expert you found online. In this way you’ll be able to follow where you’re right and wrong in your trading. You’ll also have a much greater feeling of achievement, because it was you who made a successful trade based on your own knowledge, not that of someone else.

I’d also add that making your own decisions keeps you closer to an assessment of risk that is right for you. Another person may have a completely different set of life circumstances, which means they assess risk differently. If you are going to take advice from others, be sure to follow channels that are more educational than directive, so you can learn the common patterns and indicators for yourself.

Finally, once you start a trading strategy, it pays to stick with it, because your first instinct is based on your intuition, so don’t second-guess yourself; that’s when trouble begins.

The barriers to DEX adoption

There is a lot of talk about the decentralised exchange (DEX) concept and the attendant benefits and problems. The primary benefit of a DEX is that it cuts out the middlemen in all kinds of transactions, which tends to lower costs and speed up processes. In addition, there is no single, central entity that can impose regulations on a DEX on a sudden whim; this might include banning cryptocurrencies for example, or the DEX itself. This is quite important when you look at countries where exchanges and currencies have been banned, or their use restricted.

Furthermore, when this type of exchange does not exist, people wishing to invest in cryptocurrencies are subject to government regulations as applied to existing financial markets – so you end up having ‘more of the same’. A decentralised exchange also offers better security. In a DEX each user is in private control of their own funds, so there is no central point for hackers to attack, as they did with Mt Gox.

And, a DEX potentially has the means to facilitate faster and cheaper transactions than a centralised exchange, since there is no third party authenticator. However, this has yet to be tested out on a big scale.

What is stopping DEX adoption?

One of the biggest downsides of DEXs as we currently know them is that they lack the functionality of centralised exchanges. At the moment they only offer the most basic functions and don’t have any of the frills, like a stop-loss mechanism. The other issue that acts against them being more widely used is that they lack they can’t convert to fiat currencies due to existing KYC and AML regulations. If they did, they would become centralised exchanges. So, anyone using a DEX can only use cryptocurrency deposits.

And there are other barriers, at least in the eyes of governments and financial regulators. One of the most difficult to overcome is taxation.  Because a DEX doesn’t have any centralised function, authorities such as taxation and regulation bodies have no power over a DEX. If there was mass adoption of DEXs and they replaced centralised exchanges, hundreds of billions of dollars would be hidden from the view of taxation and regulation bodies. We’ve already seen countries like China and India banning crypto because the governments see this as a major issue.

There are some existing exchanges that claim to be shifting towards a decentralised model, saying that the fact they are currently centralised helps to speed up their development. That idea is one that causes heated debates, because we know that to truly be decentralised these exchanges will have to radically rewrite the platform protocols. But, while there may be barriers to wider adoption of decentralised exchanges right now, this is not to say it will remain this way forever – this is a sector of the blockchain world that will continue to be of interest to everyone involved in it.

 

 

 

3 types of decentralised exchanges

Image result for decentralised exchanges

Cryptocurrencies are making steady progress in the traditional financial system. Their ascendance shines a spotlight on exchanges where people trade crypto assets and a number of them have been found wanting, due to a ‘single point of failure’ that allows hacks to occur.

The solution is decentralised exchanges (DEX), because this type of exchange allows users to keep control of their funds throughout the trading procedure. As might be expected there is more than one type of decentralised exchange to choose from, and there are three formats that are considered the most likely to be the exchange models of the future.

At the moment, decentralised exchanges are being developed in three modes:

  1. On-chain order books and settlements
  2. Off-chain order books with on-chain settlement
  3. Smart contract-managed reserves

On-chain order books and settlements

These are entirely blockchain based and are really the first generation model. With this DEX, every new order or adjustment to an existing order updates the state of the blockchain.

What’s the problem with this type of DEX?

Although it protects user privacy and security this form of DEX makes exchanges illiquid, slow, expensive and unable to operate with other DEX.

Off-chain order books and on-chain settlement

The Ox protocol is good example of this model. It is built on the Ethereum blockchain’s solution for off-chain orders. Execution of the trades happens on the Ethereum blockchain,which means users have control of their funds until the exchange takes place. The order books are hosted by a third party called Relayers. This enables the exchange to maintain liquidity and create a more robust infrastructure for traders. For example, after submitting an order to the Relayer, a market maker waits for an order to be filled, at which point the trade is trustlessly executed on the blockchain.

Smart contract-managed reserves

This model connects the buyer and seller function when there is low liquidity. With smart contract-managed reserves, instead of having to find a buyer for the bitcoin, a user can trade with an external reserve, depositing bitcoin into the reserve and receiving ether in return. Bancor is an example of this model.

Although the existing decentralised exchanges need work to bring them up to a comparable speed with the traditional centralised exchanges, there are several innovative entrepreneurs working on finding the best solutions, and hopefully we will see them next year, if not in 2018.