Sasha Ivanov, the CEO of smart-contracts blockchain platform Waves and blockchain infrastructure firm Vostok stated that decentralized exchanges can compete against centralized trading platforms. In turn, eliminating fake volumes from the global marketplace.
These days, trading platforms are prone to creating fake volumes, thereby leading to dishonest methods by market leaders. CER, a cryptocurrency research group, looked into BitForex, FCoin, and CoinEx and assessed their business models and volume. The research determined the trading platforms’ social media engagement, website traffic, and demand and then compared them to trusted cryptocurrency exchanges in the industry.
The study then discovered that BitForex, FCoin, and CoinEx did not have the level of traffic, active users, social media users, and activity to justify the large volumes claimed.
CER reearchers stated,
“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.”
It is cheap, simple, and easy to conduct a wash trade and bot trading on a centralized exchange. These efforts ultimately lead to bulked-up volume. Further, given that centralized exchanges are operated by a central authority, information such as numbers, business models, revenue, and operations are visible to the public.
“Of course, there is this problem of fake volumes. Exchanges are trying to inflate their volumes through imitating their natural volumes, mostly for marketing purposes. This probably has to be solved in the same way as it has been solved in traditional markets, there has to be some regulation and control over exchanges.”
The development of sophisticated decentralized exchanges and fairness and transparency are not a surprise for investors, who anticipated their development. Decentralized exchanges provide higher levels of security, transparency, and liquidity. According to Fred Ehrsam, Coinbase co-founder, decentralized exchanges share a pool of liquidity on centralized pools, which has a provide more liquidity than centralized platforms.
There is a significant limitation though, and that is the user experience. Data requests must be processed through a public blockchain network with the use of smart contracts. Ivanov stated,
“Decentralized exchanges are going to become more and more important, and it will be much more easier to filter out fake volumes in the decentralized setting. Because basically, everyone can see all the trades and it is quite [easy] to see if some trades are suspicious. In the near future, we will see total victory of decentralized exchanges but at the same time, there is going to be some interaction between centralized exchanges and decentralized exchanges.”
The development of a decentralized exchange of its own is already underway at Binance. Though the centralized trading can negatively impact the platform’s business models, the platform also is looking forward by adopting a purely decentralized ecosystem, which is more in-demand among investors.