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Noncustodial Crypto Exchanges, Explained
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Noncustodial Crypto Exchanges, Explained


1. What is a noncustodial exchange?

A noncustodial exchange (NCE) is a service that facilitates the trade of different cryptocurrencies without ever 
holding user funds. 

On the surface, noncustodial exchanges don’t seem different from decentralized exchanges. This is because both these of types of exchanges don’t hold user funds (fiat or cryptocurrency). This is the main characteristic shared between the two, but NCEs offer some benefits that could see them become a more popular alternative to centralized exchanges. Some of the most popular NCEs essentially act as intermediary services that allow users to exchange different cryptocurrencies from a variety of exchanges. 

The caveat is the same as decentralized exchanges, in that NCEs don’t hold user funds. They simply facilitate the provision of cryptocurrency trading and conversion options between users and exchanges. The reason they are becoming more popular than decentralized exchanges is because of the support and user-friendly services that are now available to millions of crypto users.

The conversion process is simple for the users. An input and output wallet address are provided by the user and the exchange takes care of the conversion automatically. Furthermore, several NCE services have now been integrated into mainstream blockchain wallets that can be accessed with all types of mobile devices.


2. What is the difference between NCE and DEX?

A decentralized exchange (DEX) is a peer-to-peer (P2P) online service that allows direct cryptocurrency transactions between two interested parties.

Decentralized exchanges (DEX) may offer users control of their crypto holdings but many of these exchanges suffer from low trade volumes, slow transaction speeds and a small selection of cryptocurrency trading pairs.

Related: DEX, Explained

This is where NCE’s are bridging the gap by becoming an intermediary between mainstream centralized exchanges and users that will not compromise on the control of their own cryptocurrency holdings.

Shapeshift, Changelly, Changenow and Faast are just a few examples of NCE’s that are currently in operation. These services source cryptocurrency trading pairs from a wide variety of centralized exchanges and integrate them into their platforms. Users can then trade one cryptocurrency for another on the platform, without having to store their crypto holdings on the exchange. 

Due to the relatively low volumes on DEXs, transactions can be comparatively slow compared to centralized exchanges. Considering that NCE’s aggregate trades from various centralized exchanges, they boast faster transaction times than their decentralized cousins.

3. What are the advantages of NCEs?

There are a number of advantages that make NCEs an appealing alternative to both centralized and decentralized cryptocurrency exchanges.

User control: Firstly, users maintain control of their own crypto wallets, private keys and holdings. Some platforms allow users to remain anonymous by not requiring any documentation for account creation, others require customers to complete Know Your Customer (KYC) verification.

Variety of crypto trading pairs: NCEs essentially act as aggregators of cryptocurrency trading pairs. They do not require users to deposit funds or crypto holdings and provide a wide range of trading pairs.

Security: By not having to store funds on an exchange, users don’t need to worry about their cryptocurrencies being stolen or lost. Furthermore, most exchanges do not collect user identity information, which allows for the retention of anonymity.

Speed: In comparison to decentralized exchanges, NCE’s boast much faster conversions and trades for users. This is mainly due to their access to a wide range of centralized exchanges that have large trade volumes and a variety of cryptocurrencies. 

Low costs: Another major drawcard of NCEs are similar trading fees to regular cryptocurrency exchanges. Since most exchanges charge substantial fees for withdrawal of funds, and a user would be paying mining fees several times to transfer the funds from and back to a wallet, in some cases it may be cheaper to use NCEs, especially given the fact that far fewer steps will need to be taken to convert crypto.

User-friendly experience: NCEs provide users with an experience similar to that of the most popular centralized exchanges. This essentially creates a middle ground where users can enjoy easy-to-use applications and platforms while maintaining full control of their private keys and crypto holdings.

Trades are made on the user’s behalf and the user receives the cryptocurrency directly into their own wallet. Furthermore, some of these NCEs have easy-to-use mobile apps, like Changelly, which makes them more appealing to users who wish to keep control of their private keys.

Also, Shapeshift recently announced support for hardware wallets, which allows users to keep their crypto in a highly secure wallet while retaining the ability to quickly send and receive crypto on the platform.

4. What are the disadvantages of NCEs?

Much like decentralized exchanges, users have full control of their private keys and are thus responsible for the transactions they make.

The onus is on a user to provide the correct address when making trades or conversions. Any trades made by a user won’t be reversible, a stark reminder that users must be fully responsible for every transaction. Therefore, one of the things to look out for are “clipboard jackers,” which is malicious software that automatically replaces a copied crypto wallet address and replaces it with that of the hacker. Subsequently, none of the funds will reach the original destination.

Furthermore, users don’t enjoy the same amount of support as they would on mainstream custodial exchanges that hold user funds. While NCEs essentially shield users from any potential hacks or theft of funds, they themselves are not immune to these situations. In 2016, Shapeshift’s hot wallet was hacked, but user funds were not affected.

Furthermore, varying criminal investigations have seen hackers laundering funds through platforms like Changelly. In these instances, the exchange is obliged to hand over information like wallet addresses, usernames, IPs and emails, although they most often than not do not collect any other personal data.


by Gareth Jenkinson
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