The benefits of exchanges were outlined in the previous article. In this post, we will discuss why a fair and trusted exchange is needed in trading blockchain digital assets.
The nature of blockchains
First, we should define what we mean by blockchain and the properties of being trustless. Bitcoin, as the first in the most recent wave of cryptocurrencies as we know them, defines both a token which represents a store of value and a distributed ledger that records the full history of transactions between parties represented by addresses. The decentralized ledger is protected by cryptographic operations and economic incentives, more generally known as a consensus protocol. It is the consensus protocol that defines the process for adding legitimate transactions to the blockchain and protection against attempts to defraud the ledger.
Since bitcoin’s emergence in late 2008, other blockchains have emerged. Examples include Ethereum, with the Ether cryptocurrency and further tokens for other uses being issued on Ethereum as ERC20 tokens and so on…
How exchanges facilitate assets transfer across blockchains
The exchange of these tokens within their respective blockchains tends to be a well defined process. And as outlined before, the consensus protocol, once implemented correctly, provides a very high level of assurance on the integrity of the transactions within the blockchain.
However, there is no standardized mechanism for transferring assets between blockchains, i.e. between Bitcoin and Ethereum or Stellar and Monero etc. For holders of a given token wishing to transfer the value into another token (e.g Bitcoin to Ether), a mechanism is needed to facilitate the process. In the absence of a mechanism native to the blockchains for transferring assets from a source to a target blockchain, an intermediary to negotiate the transfer is necessary.
Exchanges exist to meet the need for this intermediary mechanism by providing a venue for price discovery – setting the agreed value between different cryptocurrencies and digital assets, and the matching of interested buyers and sellers. Furthermore, the exchange also provides the connector between these different blockchains, enabling the transfer of assets between them as trades are completed or at request of the trader.
Whilst simple in its premise, the implementation of such features can vary widely between different exchanges, and the operations of the exchanges can be both used and abused by traders and even the exchange operators in the pursuit of profit.
Examples include cases of market abuse, laundered crypto, and security breaches such as crypto hacks in Japan. Let’s also not forget the lag between the early generations of digital asset exchanges and mature tier 1 exchanges in the services and connectivity being offered.
AAX’s vision of a fair exchange
It is fact that crypto exchanges have a long way to reach maturity, and this is an inspiration for AAX to continue to strive towards creating a fair exchange for all and we attempt to take the first steps by addressing these three critical market needs:
A fair and orderly market
The LSEG Technology powering AAX has rich features to cultivate a fair trading environment.
Ensuring the legitimacy of fund sources – whether crypto or fiat
The stringent KYC and AML processes of AAX effectively screen users to build a trusted community of traders.
The need for secure custody of digital assets
The wallets of AAX are institutional-grade, multi-signature, multi-coin transactional wallets.
Our values of integrity, security and performance each map to specific characteristics and operations of AAX to help ensure that all investors benefit from trading digital assets on a truly trusted exchange that meets the needs of the market.
In the coming weeks, we’ll explore each of these values and the initiatives we’re taking to build AAX as the institutional grade solution for all.
To find out more about AAX or to pre-register please visit www.aax.com