Challenges of Cryptocurrency Exchange Development
Challenges of Cryptocurrency Exchange Development
Let us tell you what problems interfere with cryptocurrency exchange development, as well as about who and how to solve them. This will help to understand which currencies have a future and growth potential, and which ones will leave the market due to the technological lag.
The essence of the problem. The Encrybit survey showed that 40% of cryptocurrency traders consider security as the main problem in the exchange of cryptocurrency assets. And this is understandable, since, according to Group-IB, the activity of hacker attacks on cryptocurrency services in 2018 increased by 700% compared to last year.
They studied the indicators of the 19 most popular exchanges in Group-IB. They found that at least 5 of them were victims of hackers: HitBTC, Bitstamp, Poloniex, Bithumb, Bitfinex and, Huobi.
These are cryptocurrency exchanges that have a good security system: "Security perimeter", several levels of protection for authentication and other means of protection. It is terrible to think what is happening with security on online exchangers and p2p-platforms.
How to solve a problem. The study of the Mistertango payment platform showed that 55% of users of cryptocurrency are ready for the introduction of the AML/KYC procedure and other means of protection in order to increase the level of security of cryptocurrency operations.
Other security features can be:
● use of biometric data for authentication;
● use of AI, quantum entanglement and other advanced technologies to increase the level of protection;
● transition to platforms created on the basis of decentralized blockchains.
What has been done. A decentralized cryptocurrency exchange is a platform that brings the seller and buyer of cryptocurrency together, giving them the opportunity to make a deal without having to transfer funds to a third party account (exchange). That is, if you, for example, buy bitcoins for dollars, you and your counterparty do not need to open a deposit on the exchange - you initiate a smart contract and make an exchange.
The most popular decentralized exchanges — EtherDELTA, IDEX, Tidex, Stellarport, ShapeShift, DDEX, Waves DEX, OmiseGo and 0x.
The use of biometrics supports such cryptocurrency wallets asBitGo, TronWallet, Spatium, Coinbase and Hilltop. All of them give access to funds only after authentication, which may involve a fingerprint, face ID or retinal scan. At the same time, the developers promise that after the portable and relatively cheap DNA scanners appear, they will also be involved.
For the safe exchange of one cryptocurrency to another, they invented an “atomic swap” - special smart contracts that guarantee the exchange of values between two blockchains without intermediaries and guarantors. Atomic swap support Bitcoin, Decred, Vertcoin and Litecoin.
Quantum entanglement in the field of cyber security so far no one has been able to implement, including banks and states (there are doubts here, since the data can be classified).
The essence of the problem. Many cryptocurrencies like Ethereum and Bitcoin, have a growth limitation due to the fact that when a certain level of user activity is reached, system performance drops sharply: the time required to confirm transactions increases, commission fees increase.
In Bitcoin, the limit is in the region of 7 transactions per second, in the Ethereum - 20 operations per second. If users perform more operations than the blockchain can process, a queue is formed. This leads to an increase in commissions, since the larger they are, the higher the priority in the queue.
According to this scenario, events developed in the summer, and then at the end of 2017, when thousands of queues formed in the Bitcoin network, due to which the transaction time increased to several days, and the commission jumped to $50.
How to solve a problem. Experts offer the following options:
- increase the block size or make it customizable (according to the decision of miners or depending on the load on the system);
- replace the PoW consensus protocol with another, for example, PoS;
- use centralized blockchains;
- process part of the transaction "offline".
What has been done. In the Bitcoin network, the problem of scalability was partially solved by updating SegWit, which increased the blockchain bandwidth from 3 to 7 operations per second and implemented Lightning Network (LN).
Lightning Network allows you to create payment gateways between users, within which you can make almost instant transactions with an unusually low commission. Only the opening of the channel and its closure is prescribed in the blockchain, since all operations inside the gateway are carried out "off-line".
Ethereum plans to solve the problem of scalability using the Raiden Network technology (analogue of LN), as well as a possible transition to the PoS or Zk-Snarks consensus protocol and the introduction of several other technologies: State Channels, Sharding and Plasma. In addition, the replacement of EVM by eWASM is discussed.
Other cryptocurrencies introduce similar technologies or initially use centralized blockchains that work faster but have lower security standards. These are coins like Ripple, NEO, Cardano, IOTA and NEM.
And don't forget about liquidity providers for a cryptocurrency exchange
The essence of the problem. Cryptocurrencies cannot be used for ordinary payments, as they are too complicated, have an unstable rate and are accepted by a limited number of points of sale of goods and services: shops, airlines, hotels and the like.
How to solve a problem.use cryptocurrency scripts, you need to understand how this technology works, download a cryptocurrency wallet, register on the network, figure out how to make transactions, and constantly recheck everything - it's too difficult to buy a cup of coffee or a plane ticket.
Most of this process will become unnecessary if you use a cryptocurrency debit card and/or simple mobile applications. With their help, you can make financial and payment transactions with the same ease as a VISA card or PayPal payment system.
You can increase the level of understanding of technology through advertising, educational programs and expanding the scope of cryptocurrency. 10 years ago, few people understood how to work in online banking. Now it is the norm for 66% of Americans and 70% of UK residents. With cryptocurrency will also.
The level of market acceptance will grow with the spread of cryptocurrency in the world, reducing the complexity of their use and reducing the rate of volatility. The latter will occur automatically as the capitalization of cryptocurrency increases - as it happened with the rate of Internet companies' shares at the beginning of zero.
What has been done. Most of the popular cryptocurrency wallets acquired mobile versions. Debit cards use Cryptopay, Coinkite and others. Some companies only issue debit cards that can be used as bank cards.
Overstock was the first major marketplace to start accepting bitcoins. It was followed by online stores of Xbox, Expedia, Newegg, Virgin Galactic and thousands of others. As of November 2018, there are 13 thousand sites in the world that accept a crypt when paying for goods and services.
It is also worth noting that there are more and more ATMs-ATMs in the world, with the help of which you can make purchase and sale of cryptocurrency using Fiat or bank cards. The first such ATM was installed in 2013 in the center of Vancouver. Now there are 4,000, most of which are installed in the US.
At these ATMs, you can sell and buy Bitcoin, Bitcoin Cash, Ether, Litecoin, Dogecoin, Monero, Zcash and Dash. The developers promise that the number of currencies will gradually grow until it reaches the first hundred of cryptocurrencies by capitalization.
The essence of the problem. Microtransactions are transactions with very small amounts, which usually occur when buying and selling low-value goods. For example, when buying a pen, a cup of tea or a pack of matches. To service such operations, you need a payment system with high speed and very small commissions.
Bitcoin, Bitcoin Cash, Ethereumand other popular cryptocurrencies are not suitable for servicing microtransactions due to low speed and high commissions for such operations. For example, buying a pen for $1 using bitcoins will take 30–60 minutes and cost $1.5 ($1 per pen + $0.5 of commission).
How to solve a problem. This can be done in two ways:
1. use centralized cryptocurrencies to increase transaction speed by reducing the level of security;
2. create payment channels on top of the blockchain network, so that operations take place “offline”.
What has been done. Most of the new cryptocurrencies went the first way, because it is easier and cheaper. However, many people don’t like it, because users prefer high-speed security.
“Old” cryptocurrencies are forced to resort to new technologies to create the conditions for microtransactions. For example, in Bitcoin, the previously mentioned Lightning Network technology is used for this. Thanks to it, the capacity of the system will increase to 10,000 operations per second, and one cent will be enough for a month of active use of the LN channel.
Lightning Network is in open beta. In September 2018, the number of test participants reached 12,000 users. In October, a Brazilian Bitcoin enthusiast "taught" the Coca-Cola vending machine to accept cryptocurrency using the Lightning Network. To use such an ATM, you need to scan a QR code with a BTC address and pay for it with a wallet that supports the Lightning Network.
The essence of the problem. Legal issues related to cryptocurrency transactions can be divided into two categories:
- prohibitive measures - some countries, referring to the possibility of using cryptocurrencies to finance terrorism, money laundering and tax evasion, decided to ban them. These include Vietnam, Kyrgyzstan, Bangladesh, Ecuador and Bolivia.
- jurisdiction and taxation - so far no country has introduced rules according to which it would be unambiguously clear how operations and income related to cryptocurrency are levied, and what operations fall under this or that jurisdiction.
How to solve a problem. The Mistertango study found that 88% of cryptocurrency exchangers want more industry regulation to improve the reputation of the technology and avoid the turmoil associated with scandals around hacker attacks, fraud and other negative scenarios.
Thus, the elimination of legal barriers to the development of a cryptocurrency market is associated with lobbying legislative acts that increase market regulation.
This can be done in several ways:
- hold rallies, actions, meetings with officials;
- create organizations that will do this;
- hire lobbyists.
What has been done. Cryptocurrencies feel best in Switzerland because they are equated to foreign currencies there. In Germany, bitcoins and other digital money were recognized as a settlement currency. In Japan, they are legalized as a means of payment. In Russia, Ukraine, Belarus and a number of other countries there are no restrictions on the sale and purchase of cryptocurrencies, but there are problems with the taxation of such operations
In the US, cryptocurrencies are legalized (as an investment asset) and taxed:
- if a currency is kept for less than a year and its price has increased, then this income falls under the personal income tax with a progressive scale from 10% to 37%;
- if a currency is kept longer than a year and its price has increased, a tax is imposed on long-term capital gains and is taxed at a rate of 24%;
- if the cryptocurrency passed the Howey test, its coins are considered shares and are taxed according to the above rules.
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