Crypto exchanges are getting out of hand, do we need an epiphany?

As the crypto ecosystem develop, exchanges are playing a significant role. Those which accept fiat, like Coinbase or Kraken are the gatekeepers of the whole ecosystem. Other token-only exchanges, such as Bittrex or Binance are essential to be able to buy various tokens.

If you compare even the most advanced exchanges to a regular (stock/bonds) trading platform, we are still in the junior’s league. To fill the gap, we’ll need professional-grade exchanges able to handle the flood of daily transactions AND all the legal requirements: KYC, AML compliance (money laundering prevention) and any other legal requirements the country they serve might have. And of course, they’ll need to be decentralized.

The current regulatory situation around cryptocurrency is getting more precise all around the world. Some countries are more permissive than others, and the tax laws also play a role. Establishing a global exchange is a gigantic task considering the patchwork of different local regulations (in the US, each state can make its own).

Before we dive into Epiphany, I think it’s good to take a step back to understand what this project is trying to achieve. Bitcoin is now ten years old, and the blockchain evolved since its beginnings. Satoshi’s vision for Bitcoin is enlightening to understand the current events in the cryptocurrency ecosystem.

THE IDENTITY CRISIS OF A TEENAGE BLOCKCHAIN

THE FOUNDING PRINCIPLES

Originally, Bitcoin was created as a reaction to the 2008 crash. Satoshi, its creator, wanted to create a new form of money, with two key characteristics to prevent the same scenario from happening again:

  1. Decentralized: unlike banks, blockchain networks are maintained by many users, and not only the company/development team. Depending on the project, the community can help by verifying transactions, running nodes, or even contributing to the communication and marketing. No one is sovereign to say where the project should go. There is no single point of failure on the network: to compromise it, one must gain control over it. (the 51% attack) Decentralization is critical, but it’s not given.
  2. Trustless: DAO (Decentralized Autonomous Organizations) are organizations that run through rules encoded in smart contracts. They allow the creation of services that are run by the community (mining/node/PoW) and publicly auditable (the code is available to review). Therefore, trust is no longer required, unlike regular institutions. Instead, you can audit the code yourself to make sure it’s honest, or check the reviews made by the community.

VERSUS THE CURRENT REALITY

Those principles were the spirit of the beginning, and it served the community well. Yet nowadays, some significant projects are compromising on decentralization. Indeed, decentralization is hard and tedious. Some companies chose to go another way instead: they start centralized and promise that they will decentralize once they scale, like Binance. Currently, most of the main crypto exchanges are centralized: the company running the exchange serves as a middleman. Coinbase or Bittrex are one of such exchanges.

You see the problem though? Not only the first principle is broken, as the service is no longer decentralized. No, you also need faith in the honesty of the project leaders so that they effectively work towards decentralization someday. Therefore one could argue that the second principle, being trustless, is also not respected.

A summary of the main risks associated with centralized exchanges (source: Epiphany Whitepaper)

Besides, the centralization of trading creates other risks. The most prominent actors represent a fair share of the daily trading volume. If one of them were to fail temporally, it would already have significant consequences on the daily volumes and prices. If one were to get severely compromised, it would trigger a wave of panic around the market.

Hence the current concentration of crypto trades on a handful of centralized platforms is nothing less than a systemic risk. Luckily, many projects are addressing this, and decentralized exchanges (DEX) are getting in fashion.

WHAT ABOUT ICOs? HOW CENTRALIZED ARE THEY?

While we still have the trustless and decentralization principles, how do you feel about ICOs? Looking at from a systemic perspective: ICOs offer to a small group of selected people the chance to stockpile large amounts of a cryptocurrency. Pre-sale are the same, with even fewer people and even larger stakes. From a network perspective, ICOs are nothing else than centralization devices.

I don’t believe in ICOs anymore, and I look for alternative funding and distribution methods in crypto projects now, such as Airdrop or IBOs (Initial Bounty Offering). EPN tokens will only be available to the public once the platform is online and working.

Note: Centralization vs. decentralization is not a black and white issue. Creating and scaling a decentralized project is hard. It can make sense to have centralized phases or components in a decentralized project. Even in anarchy, you may need a leader to rally the troops on the battlefield. Decentralization is an ideal to strive for.

INTRODUCING EPIPHANY

Epiphany’s goal is to provide a professional-grade decentralized cryptocurrency exchange in compliance with the global financial regulatory framework.

This is a vast project, but I think Epiphany’s team is the one able to pull it off, and they already made excellent calls to ensure their ambition materialize:

  1. The absence of ICO will help avoid concentrating the EPN tokens in the hands of a few. I look for alternative funding and distribution methods in crypto project now. EPN tokens will only be available to the public once the platform is online and working
  2. The choice of NEO: I’ll leave to others the technical details of the superiority of NEO, but Epiphany makes a lot of sense to me on NEO. First, NEO is about compliance before anything else. Ultimately, their goal is to have their code become law. Moreover, I see a lot of synergy between Epiphany and other projects on the NEO blockchain, such as Ontology for identity verifications or the stable coin Alchemint.
  3. The focus on compliance: tech is cool, it matters a lot. Yet even with the best tech, blockchain exchanges will have to integrate themselves in the current legal and financial framework to reach mainstream audience. I think Epiphany’s team understood this very early on. They aim to get a Money Transmitter license in every American state, and have obtained a few already (California, Texas, Arizona…).
  4. A decentralized exchanges solve the information asymmetry issue: on centralized exchanges, the data is often withheld by the operator. However, on a decentralized exchange, since all the transactions are stored within the ?blockchain, they are publicly accessible. You wonder why it matters? Simply remember or learn about what happened when Coinbase suddenly added BitCoin Cash and the mayhem that followed That’s a pretty good example of the dramatic consequences information asymmetry can have.
  5. Epiphany is a platform, not just an exchange. The first critical elements of the ecosystem are detailed in the whitepaper: a fiat money exchange platform, a token trading platform, a settlement and brokerage service and service provide access (API).

To wrap this up, I would like to come back on the topic of ICOs and especially what to replace them with. I think IBOs are a great alternative, as they motivate the community to get involved in the project. The terms of IBOs must be well crafted to avoid turning this into a spamming contest.

Airdrop, like ONT did can also be a way to distribute the token evenly. The early community member of Ontology who subscribed to the newsletter and submitted their KYC got 1000 ONT token for this, currently worth $8 each.

If you are interested in Epiphany, you can read the whitepaper, and signup to participate in the bounty campaign to earn EPN once the platform goes live.


Crypto exchanges are getting out of hand, do we need an epiphany? was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.