The importance of decentralised Data Exchanges
an overview
Intro
In a world where our entire lives and the majority of our communication, transactions and personal content occur in digital form, the importance of data safety and privacy has become tantamount.
And with that comes the key question on who controls our data, how does our data get regulated and where does our right to privacy begin and where does that privacy end.
As it stands, companies such as Google, Amazon, Yahoo, Facebook etc. have become the gatekeepers of information, putting an incredible amount of power and control of information into the hands of a few.
It also means, that the safety of information, despite all regulation, is left to those corporations and, being stored on centralised servers, is only as safe as their safety infrastructure. Should that be breached through external interference or internal human error, that information’s safety is immediately compromised.
Additionally, how do we as individuals, or even as companies, verify, that the information we consume today is accurate and not fabricated?
Under the heading of free information for all and algorithmic information tailoring, no two people with get the same search results on most search engines. Social media newsfeeds are a reflection of content shared in the past, personal interests and those associated profiles we interact with the most. But this makes for a one-sided, unreliable information feed.
For companies, who’s primary, or secondary business is the trading, selling or acquiring of information, there are information brokers that operate on a big scale or industry niche specifically, but for most smaller companies, it means marketing themselves in an age, where there is an incredible amount of information available, which always still needs to be verified for its validity and content.
What’s more, a centralised system of any kind, put’s its trust in a single control point that cannot fail, lest it bring the entire system down with it. This is true not just for data and information, but also for the financial sector, supply chains and even government infrastructure.
Let’s take a look at some differences between centralised and decentralised systems, their associated privacy and risk concerns, their pros and cons, and why decentralised data exchanges will be so important to the future of our world.
Centralised vs Decentralised
Pro’s and Con’s
To date, the most common electronic system infrastructure has been based on a centralised model.
That means a system is built on a single central server unit which responds to multiple different client nodes.
Wikipedia is a good example, or a corporations’ central data storage facility. A client server sends a request to Wikipedia, and based on the content of the request, the central server responds with the requested content.
A centralised system basically contains a Server, communication link and a node, such as a computer or a mobile.
Having one central server, however, means, that there are scalability limitations, the system can slow down due to processing bottlenecks through traffic spikes, is highly reliant on network connectivity, has only limited data backup options and poses issues around server maintenance. The only way to undertake maintenance on such a system is to periodically shut the entire network down.
A decentralised system on the other hand is characterised by the fact, that each node in the system operates autonomously and essentially acts as its own central unit. That means if one node in the system fails, it can never corrupt the entire network.
One big advantage of such a system is, that it can be scaled indefinitely and through scaling simultaneously improves its overall performance and thus avoids performance bottlenecks from occurring. It’s structure also means that any node can take on a superior role in the network and act as a control mechanism over the others.
That makes it very hard to regulate, but ensures a high level of privacy and data security through its peer-to-peer infrastructure.
One of the earliest versions of decentralised networks are BitTorrent, LimeWire and eMule, that were built on peer-to-peer data sharing.
We will talk about regulation of decentralised infrastructures related to blockchain bit later in this article.
There are some advantages to a centralised system, despite the limitations around scalability and safety and privacy concerns. One of the big advantages, especially for small enterprises, is that a centralised system is simply more cost-efficient to set up.
It is easier to maintain with system updates, individual nodes can easily be detached from the system, and it is relatively easy to perform data analysis.
It also allows total control of the content, operational system access and system modifications.
But those advantages are being dwarfed in today’s day and age by the risks to privacy, server security and inaccurate content.
And traditional forms of data protection such as privacy laws and regulations still do not change the fact that an astronomical amount of sensitive data is passing through central servers every minute of every day. And as we have already mentioned, any centralised system is much more at risk of cyberattacks and data theft. This is where decentralised networks pose a viable alternative solution.
Advantages of decentralised
One of the big advantages of decentralisation is the ability for users to participate in a zero-trust environment, where the control of information is no longer held by a single corporation or service provider.
Due to trust in institutions and corporations, private and government alike, being at an all-time low, the trustless exchange and decentralised storage of information with the development of blockchain technology and smart contracts has taken centre stage for many.
Ironically, still a vast majority of cryptocurrencies are being traded on centralised exchanges. And as already mentioned in the introduction, any centralised systems weak points, are its single points of potential failure. A human error at Amazon’s web service centre led to the crash of thousands of websites in 2017, rendering them inoperable for a period of time.
Another recent example of a huge data breach due to centralised data storage is the 2018 Facebook Cambridge Analytica scandal, where Cambridge Analytica harvested the personal information of millions of Facebook users for the purpose of targeted political advertisements.1
An even more simple example is our internet router at home. If that fails, crashes or gets unplugged, our access to information through any device reliant on that router, stops.
With decentralisation that information is stored on, and controlled by, not one single facility, but by the collective of network users, alleviating that single convergence point in a systems’ infrastructure.
Decentralisation also puts the control and power to make collective decisions back into the hands of its user base, as opposed to the hands of a few. In addition, most DEX ecosystems are open sourced projects, especially in the blockchain and crypto space, meaning, that anyone can use the technology, as opposed to having a closed market system that relies on a sole service providers’ generosity. A great example here is Apple, that has strict censorship over what apps it allows to be made available to its product users.
Another advantage of any DEX worth mentioning is, that it is fast and unalterable. Transactions are not processed through a third party, but directly between two peers, and as soon as something is added into a block on the chain, it can no longer be altered by any means.
What this all essentially means is, that if an exchange is truly decentralised, it can run indefinitely on its own, irrespective of the further involvement of its creator or creators.
Privacy and smart contracts
The aforementioned advantages focus on decentralisation as a whole infrastructure. But how does privacy become stronger through decentralised ecosystems, and what importance to smart contracts play in it?
Well firstly, peer-to-peer communication is much harder to regulate than centralised communication, already ensuring a lot more privacy through its very nature.
And since the public ledgers only story hashed pointers, no detailed or private information can be taken from them.
With the rise of blockchain technology, smart contracts have become a central selling point of that technology. A smart contract, in essence, is “a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralised blockchain network. The code controls the execution, and transactions are trackable and irreversible.”
This is a key component to the topics of decentralisation, safety and privacy because the biggest concern around safety and privacy is trust.
Zero trust economy through DEX’s
With smart contracts, two anonymous parties can settle any transaction without the concern around trust. And that very fact is one of the foundation blocks of decentralised exchanges.
Not only do smart contracts settle the question of trust within a transactional exchange, but a decentralised exchange also bypasses the privacy concerns of centralisation, by letting users directly interact with one another, without an institutional intermediary.
Since DEX’s don’t store user data or assets, any risk from hackers or foreign access to the exchange does not necessarily pose a risk to the ecosystem and its participants as a whole, the same way it would with a centralised exchange, and can technically not lead to a mass breach of data.
Due to their blockchain foundation, DEX’s also minimise the risks of information manipulation, offer a wider range of potential services and are not at the mercy of regulating authorities, that can impact, restrict or completely shut down the operation.
But it’s not all unicorns and rainbows. Decentralised exchanges also mean:
- a smaller set of trading options in the case of currencies and other financial products,
- an inherent inability to recover access in the event of lost passwords,
- certain issues around scalability due to the nature of a decentralised network
- and only limited support services.
Still, depending on the nature of a DEX, the pros still outweigh the cons.
Risks through equipment hacks…
However secure a decentralised network is to attacks and centralised surveillance, there are still the risks of data security posed by personal equipment of the user.
Since we do not generally worry as much about the risk of foreign access to a laptop, tablet or smartphones as much as we should, they still do pose the weak points to our information’s safety, despite all of the privacy advantages a decentralised network has to offer.
Future of DEX data marketplaces
In today’s world, data is the most valuable economic asset available. And Information security is the biggest challenge in today’s world of social media, cloud computing and centralised data storage.
Any single service provider or data storage facility is at risk of hacking, foreign interference and data mining.
Through centralising control of data and information, the individual user and consumer has lost control of their data, putting their trust into the hands of central storage- and service providers.
But the risk of cyberattacks and the fact of cyber surveillance is ever present, and as has been witnessed with the last US election or through whistleblowers like Edward Snowden etc., so is the risk of that data being abused.
In addition to personal data, companies and corporations are also finding it difficult to access means of securely and cost efficiently buying, selling or exchanging data.
There are already a number of larger data exchanges operating, catering to a wide range of data sets, that can be exchanged, bought or sold. Not only do marketplaces provide platforms for accessing a wider variety of data, they also lead to self-regulatory pricing, promote a higher quality and accuracy of data through diversified offerings and promote healthy competition in the data space. (source)
In a survey conducted by PWC in Germany in 2018 involving 200 different company executives, 74% of surveyed companies assume, that the demand for data exchange will increase in the medium term.
But about 30% of the survey participants voiced major concerns relating to the security risks associated with the exchange of data and worry about loosing control over their data. Additionally, the process of harnessing, verifying, compiling and exchanging quality data sets was too complex and associated with a high financial expenditure, especially for smaller players in the field.
But increased efficiency in data sharing would automatically lead to improved processes, accurate target market segmentation, tailored manufacturing… the list goes on.
And this is where decentralised Data Marketplaces come into the fold. Projects like The Agora, Ocean Protocol and Ceramic Network are pioneering that space as we speak with blockchain technology.
Not only will decentralise data exchanges and marketplaces provide a high degree of data ownership, where the owner has full control over each data set, what data is being deployed and who is granted permission to access their data. Through smart contracts the issues around trust are largely put to rest.
The challenges faced in building such an infrastructure are data ownership protocols within a scalable, decentralised ecosystem, that simultaneously meets the needs of buyers and sellers, as well as reconciling with regulators and governments on privacy and data sharing. (source)
What’s more, these decentralised data exchanges will allow smaller companies and even individuals to start participating in the exchange of valuable datasets, as there is no cost to the infrastructure set up for participating parties and with cryptocurrencies as the primary means of exchange, transaction fees can be kept to a minimum.
Looking to the future of our global data economy, assuming that users adequately secure their individual access keys, decentralised data marketplaces and trading platforms will become the safest and fastest platforms for the exchange of data in the near future.
Regulation & Privacy laws
Despite where the decentralised exchange of data, financial services and more is heading, the question of regulation and consumer protection is still widely open.
Of course the nature of a DEX is to bypass restrictive regulation, but with the importance of participant safety, some form of regulatory framework for service providers to adhere to, is tantamount.
Regulation as of today is still in its infancy. And not simply because decentralised models have only been on the rise in the areas of DeFi and DataFi, but because the definition of a decentralised network does not align with the legal definitions of most regulatory structures.
And so parallel initiatives by governments and regulators have been happening over the past few years.
Not just are there attempts to create a regulatory framework for DEX’s, but stricter consumer data protection laws, such as the EU’s GDPR Law are being formulated.
The argument is ongoing. In December 2018, the Swiss Federal Council did acknowledge, that “that decentralised structures may fall outside of the scope of existing financial market and AML regulations.”
However, in the same year, the SEC brought charges against, and fined the creator of DEX EtherDelta because despite it’s decentralised nature, the exchange “provided a marketplace for bringing together buyers and sellers for digital asset securities through the combined use of an order book, a website that displayed orders, and a “smart contract” run on the Ethereum blockchain.”
That case threw up a lot of questions regarding liability, functionality, and the definition and inclusive scope of current laws.
But whilst that debate will be ongoing for some time yet, there is no doubt, that with a wider adaptation and integration of decentralised exchanges, those frameworks will be forthcoming in due time.
Other sources
