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Can Decentralization (Finally) Pull The Strings?

Centralized models are dominating the exchange market in the trading of decentralized assets, but with serious drawbacks. DEXs are stepping in.

(August 28, 2020) — The two most talked-about business models today are the centralized model and the decentralized model. The two continue to be prominent themes of discussion and application, especially in the financial world. The epitome of the centralized system is the fiat, the physical cash we hold in our hands, while the rallying symbol of decentralization is carried by bitcoin.

The concept of centralization is the systematic concentration of power, control, and decision-making reserved within a small circle addressed to as top-level management who takes care of long-range planning and responsible for the overall health of the organization. The agreed-upon decisions then are delegated to the middle management consisting of managers and supervisors as the authority who will oversee the active implementation of such approved decisions through the operations of the rank and file, the lowest tier called the labor force.

There are a lot of benefits being reaped by a centralized structure of governance which include fairness, order, cost-efficiency, and consistency. There is reduced wastage due to the implementation of standard procedures, there is uniformity of action, and improved quality work output is achieved. The fruit of direct supervision is proper coordination and redundant roles are omitted. The centralized model boasts of efficiency and issues can be quickly decided upon.

The downsides of centralization are marked by an abuse of power which can lead to numerous censures and censorship. If that be the case, expect a compromised efficiency.

The hallmark of a decentralized business model is the distributed order of authority among all levels of management in the organization. While power and decisions are still the responsibility of the top-level management, the middle and lower management share an almost equal delegated authority and responsibility to work on for the efficient fulfilment of duties and the achievement of goals.

Decentralization lifts a heap of a burden on the part of the CEO as subordinates can independently decide and act according to set structures commensurate to their talents and skills harnessed to expertise. Diverse activities and departments can easily be implanted and grown while working relationships can be developed horizontally between departments. A decentralized model can produce a high degree of morale and motivation among subordinates due to empowered independence to decide and act.

Decentralized models are not recommended for new organizations that may still have to rely on leadership strong and capable enough to steer it through. Organizational goals may be jeopardized too early when delegated authority is in the hands of the untrained who are yet to be deeply imbibed with organizational values and skills. Horizontal management can easily breed unhealthy competition and mistrust among department heads with equal ranks which may result in an uncooperative spirit. Independent departments working to each its own may produce a lot of duplications especially in the hiring of contractors thereby incurring repetitive expenses and losses. Another challenge is in the uniformity of work and the implementation of organizational policies across diversified departments.

The growing asset class that is the cryptocurrency industry bred the need for different crypto exchanges that implement the centralized and decentralized business models. Though the core vision of the cryptocurrency industry is decentralization, the first model to cater to the buying and selling of digital currencies were centralized, naturally encountering the same issues the financial industry has with traditional financial institutions. This is not to say that decentralized exchanges (DEX) have better answers. While it addresses the issue of control, security, and anonymity, DEX has inherent problems of its own that prevent it from taking the mainstream route.

The majority of crypto exchanges are centralized and operate much like security exchanges. They are owned by companies who serve their clients by taking orders, match buyers and sellers, conduct transactions, and store up crypto assets via wallets. Entrusting client funds over to these centralized exchanges include giving up control and security. Requirements before the conduct of trade include the submission of names, addresses, government-issued IDs, and other relevant personal data.

Decentralized exchanges leave control and security to their clients as they do not require client information and store funds but only act as mere conductors of trades. Therefore, security is high, rendering the impossibility of theft and hacking. Free anonymous token trade proliferates on decentralized platforms without fear of government interference or censorship.

With all the givens that make DEX an advantage over its centralized counterpart, there are still major issues that need to be addressed.

Decentralized exchange trading that offers tokens pegged to underlying commodities or assets is prone to price manipulation. It also brings users to a long route of buying a cryptocurrency, converting it into a pegged asset before trading it to another pegged asset, then convert it to a token tradeable to crypto or fiat.

A downside of decentralized exchanges is the difficulty in converting fiat to cryptocurrency. While centralized users go from fiat through their bank account or credit card in seconds, DEX simply takes the multistep process of using escrow accounts off the exchange while transactions transpire. And it comes with additional fees.

Liquidity involves the speed of which cryptocurrencies can be quickly obtained in order for traders to obtain the best prices there are on the market in real-time. Without liquidity, any trading exchange is rendered ineffective and at most, useless. Decentralized exchanges face this dilemma as they are just coming on lately without a strong and sufficient base of customers who will provide such liquidity to function at best. Smart tokens are being invented to solve the issue of liquidity wherein smart contracts are utilized to create a bagful of tradeable tokens that can be bought or sold to other smart contracts which set market prices. If liquidity is guaranteed, trading will boom.

Centralized exchanges are still the go-to exchange of many traders and investors due to their ease of use even with the vulnerability they pose to security and control. Though some take the high-risk route of a road less travelled in the use of DEX, their venture is a much welcome presence since they provide the impetus to make the foundations of DEX work towards mass exodus and mass adoption.

eQapital is committed to serving the needs of Italy as they prepare their capabilities to shift from fiat to digital currency and back. The financial expertise we provide will help you preserve and grow your assets entering the exciting phase of a digital future.

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Your fiat and digital asset custodian. Bridging the gap between Banking and Blockchain.

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