Newcomers to blockchain may notice the irony – in an industry obsessed with decentralization, some of the biggest startups are centralized, trusted institutions.
But while it's true today that single entities are most responsible for the operation of exchanges that allow traditional money to be traded for cryptocurrency, some of the industry's oldest startups are now showing an interest in migrating to a future more in line with the spirit of the technology.
Forcing this narrative is a new wave of decentralized cryptocurrency exchanges that exist almost entirely on a blockchain, and that can dispense with the need for a third-party intermediary.
"Decentralized exchanges are clearly the way of the future," said Hugh Madden, technical director for openANX, a decentralized exchange infrastructure protocol.
Madden argues that a change in industry business models is inevitable as current designs are a target for hackers, and indeed the still-brief history of cryptocurrencies already includes several examples, most famously, Mt Gox.
Furthermore, if a centralized exchange operates in a jurisdiction without strong regulatory oversight, the operational and financial transparency of the operation can be limited. And with many such exchanges, customer coins are not technically possessed by the customer until they are withdrawn.
With decentralized exchanges, each customer's buy and sell orders are directly matched, sometimes without an order book entirely.
Michael Oved, CEO of the decentralized exchange Swap, told CoinDesk:
"Within the next 2–5 years you're going to see some really good decentralized solutions. But whether they're going to take market share [from incumbents], I'm not sure."
So, what's different about decentralized exchanges like Swap?
For one, it does not have an order book – buy and sell orders are matched completely peer-to-peer. Swap also doesn't charge fees for its service, profiting instead from the sale of tokens customers must purchase to use Swap. (These are more analogous to a one-time licensing fee.)
OpenANX and Swap, as well as 0x and Bancor, are among the newer decentralized exchanges, though there have been other attempts.
Switzerland-based ShapeShift has been in operation since 2014, and according to its CEO, Erik Voorhees, it now processes more than 15,000 customer orders each day for a total daily average of between $10m and $15m.
Meanwhile, centralized exchanges are continuing to develop their offerings, including wallet and brokerage services, as their customer bases swell due to skyrocketing cryptocurrency prices.
Still, while the decentralized models may lack in ease of use, they have advantages in other areas. The nascent market may already be more competitive, as newcomers are able to operate without the tight regulatory oversight of their peers.
The advantage is obvious, even to established startups.
"Decentralized exchanges are complementary to and important for the development of the ecosystem by acting as a middle ground," said Megan Hernbroth, a communications representative for Coinbase.
Although, she noted that, today, there are advantages in centralized exchanges:
"We believe allowing Coinbase to manage security of digital currency on behalf of users is a better solution for most users than managing their own storage."
Yet, it remains to be seen how quickly high-tech solutions will pervade the market.
The major impediment to the growth of decentralized exchanges is that they cannot currently exchange cryptocurrencies with fiat currencies; they can only transact between different cryptocurrencies, which allows them to avoid anti-money laundering regulations, among other requirements.
Relatedly, a lack of liquidity is another issue that can plague decentralized exchanges. Specific to Bancor, its business model was very publicly criticized recently by Emin Gün Sirer, co-director of Cornell University's Initiative for Cryptocurrencies and Contracts (Bancor strongly refutes the assertions).
In a recent blog, Peter Smith, CEO of wallet provider Blockchain, lamented the tradeoffs between the two main types of exchange.
"While there are a proliferation of decentralized exchange projects, they focus on pure crypto-to-crypto and are far from practical as end-to-end solutions at this point in time. Real-world banking, compliance and AML is simply not attractive to a small team of highly technical engineers," he said.
But Smith, too, sees the potential, writing:
"If you could build a platform to merge those two key competencies in a decentralized manner – letting exchange operators focus on their core competitive advantages (local language, support, compliance, and banking), while moving private key custody off balance sheets and back onto blockchains – you'd have a product that could drive value for our entire industry."
In between now and this bright future, decentralized exchanges are innovating apace. ShapeShift recently launched a product called Prism, which allows customers to build portfolios that track baskets of cryptocurrencies.
And openANX believes it has solved the problem of converting to fiat entirely.
Under its model, centralized exchanges in various jurisdictions would tokenize real-world assets, which would then be traded in a decentralized manner with openANX’s help.
Madden called the largest centralized exchanges "systemic risks" to the broader cryptocurrency ecosystem as they exist now. He envisions a future in which centralized exchanges still operate, but are focused almost entirely on navigating jurisdictional issues like banking relationships and regulation.
Even ShapeShift's Voorhees believes these models will co-exist.
He wrote in a recent Reddit AMA:
"I expect the banks of the future to look a lot like Coinbase, and I say that as a compliment to Coinbase. Crypto gives everyone the option to hold their own money, which is great, but that doesn't mean everyone should, nor that everyone will want to."