How Do Non-Custodial Exchanges Work Without A User Management System?

In what seems to be becoming a common trend nowadays another centralized exchange (CEX) has gained the attention of the crypto trading community for its inability to process withdrawals.

After Fcoin’s revelation of its insolvency problem, another CEX has also released a statement about why they have restricted the withdrawals of its international clients.

According to Upbit they have restricted withdrawals for foreigners due to enhanced Know Your Customer (KYC) requirements and South Korean taxation concerns.

However many foreigners believe that Upbit has not been forthcoming with the real reason behind the restriction.

They believe that that the restriction has nothing to do with taxation policy in South Korea and speculated that Upbit is in serious financial trouble.

It can be remembered that Upbit suffered a serious security breach on November 27, 2019, where it was confirmed it lost 343,000 ETH at the time. Due to the opacity of transactions in centralized exchanges, no one can really be sure if that is the only amount that was actually stolen.

The heart of the problem stems from the fact that Centralized Exchange (CEX) users lose custody of their assets.

The security breach on Upbeat is a prime example of the many risks inherent in using CEXs.

First is the risk of putting digital assets of customers into a few big wallets creating a 'honeypot' of users funds that are at risk of internal and external risk.

The November Upbit security breach is an example of an external risk where hackers were able to run off with depositor’s digital assets.

The other risk is having to deposit digital assets into user accounts or exchange wallets in which users do not have any relevant control.

Once users relieve themselves of custody of their digital asset they in a sense effectively relieved themselves ownership of these assets as total control of these assets now goes to the CEX operators.

These operators now have the power to restrict the depositors of the digital assets and may do what they please with the deposited funds.

Worst of all there is no way for depositors to effectively trace the movement of their deposited digital assets. 

This situation will never happen in a decentralized exchange (DEX). Unlike CEX, DEX does not have a user account system instead, DEXs require private personal wallets or non-custodial wallets where users and users alone have access to the private keys.

Since transactions are triggered and authorized directly from these wallets there is no need for traders to withdraw or deposit their digital assets. This realizes a truly transparent, frictionless, censorship-free and most secure way of making trades. 

Take the Newdex DEX for instance. The process of trading is as follows— before trading, the assets are all in user’s wallet; when you place an order, the certain amount of assets go to the entrusted account: newdexpublic (this entrusted account operated by smart contract, cannot be manipulated); after trading, the token go directly to user’s non-custodial wallet. Readers might be asking what are non-custodial wallets? To simply put these are wallets that users have created by themselves. 

They do this by using non-custodial wallet services which enables individuals to generate their own random Private keys for users’ personal wallets.

This is in direct contrast to CEX wallets which were automatically generated for the depositors by CEX operators, but do not share the private keys to the depositors, effectively maintaining control of the issued wallet account. Hence, using a non-custodial is a much safer way of storing digital assets.

Best of all you do not usually have to pay anything to create one. let me show you how to create a non-custodial wallet as well as how to use it to trade in a DEX.

There are many ways to create EOS accounts but there are very few that allow you to create a free non-custodial wallet. Fortunately one of the wallet partners of Newdex allows you to create one totally for FREE. The name of the wallet is Wombat and you can start the account creation process by going to the Newdex website as shown by the screenshot below.

Once you are on the Newdex website click on the “Sign-in” link located at the top right-hand corner of the website. A pop-out window should appear in the site showing the different ways on how to log in using the different partner wallets it supports. You need to mouse over the Wombat icon. It is the orange icon as shown in the screenshot below.

Move your mouse over its icon to show the download link where you can download the chrome extension and click on it to go to the Chrome extension store. Click on the “Add to Chrome” button to initiate the installation. 

Once the “Add  to Chrome” button is clicked a pop-out window will show reminding you that you installing a Chrome extension. Just click the white button that says “Add extension” to proceed.

Clicking the button will initiate the installation. Since the installation file is not that big the download should not take too long. 

Once installed it should show the orange icon of Wombat EOS wallet on the top-right hand corner of the screen. It also shows three ways to connect your Wombat wallet in one of your social accounts. Choose any of the options shown, we prefer using our email hence we use Google. Login to your Google account.

Now that you have logged in your google account and have associated it with Wombat you are ready to create your FREE EOS account. Just click the “Create New Account” button to initiate the process.

The next page will ask you where you want to back up your private key. You can choose any of the two options. In this case, we chose Google Drive. This is an important step as you are entirely responsible for your own private keys.

Once you have chosen which cloud storage you want to use, it will ask you to log in to that cloud. Since we chose Google Drive it will ask as to login to our Google account as shown in the screenshot below. 

Once you have chosen the account it will ask you for access permission to your Google Drive. Wombat will just be given permission to write the private key in your Google Drive and have the necessary access to it if need be. Just click on the white button labeled "Allow" to proceed

Another pop-up window will show reminding you that you might be sharing sensitive information with Wombat. Just click on the “Allow” blue button to proceed with the account creation.

The next page will ask you to input your password for the EOS wallet that you are creating. It is of utmost importance that you keep this safe and backed up. There is no way to recover this password so keep it safe. We will be needing this later when we access our non-custodial wallet.

The next window will ask the name of your EOS account. This also serves as your wallet address. Please be reminded that EOS accounts have naming conventions. It should have an exact length of 12 alphanumeric characters. Click on the “Choose” button to proceed.

Wombat will check if the name is available and if it meets the requirements will create the account by allocating the necessary resources. If you reached the page shown below congrats you have successfully created your account!

To access your account you just need to click on the Wombat Chrome extension icon on the top right-hand corner. Once clicked should show the wallet.

That is it you have successfully created your account. The next step is securing your private key. Let me show you how it is done below.

As you can see from the screenshot above the wallet has been created and the necessary resource allocation has been allocated by Wombat totally for FREE.

While the resources allocated were not much it is enough to create a functioning wallet that we can use in Newdex by utilizing its resource-free transaction allocations.

But first we want to get your private key and create another copy aside from the one that you stored in the cloud. You can access it by clicking “Setting” menu.

Clicking on “Settings” will bring you to the setting page where you can find the “Private key management” sub menu. Enter this menu to get your private key.

To access this page you will be asked for the account password. This was the password we created earlier. Just input the password and click the blue button labeled “Unlock” to proceed to the next window.

To show the “Private Key” click on the eye icon. This will reveal the hidden private key. Once you have the private key you can use this to recover your FREE EOS account in other wallets if you want.

Now that you have an EOS account we can log in to Newdex.  The following section will show you how to login using the Wombat Chrome extension wallet. 

To log in  Newdex all you have to do is to go to its website and click on the “Sign in” link.   

Once you click this, a pop-up window will show you all the possible login options. To log in just click the “Sign In” white button at the left side of the window.

If the login is successful you should see your account name on the website of Newdex as shown in the screenshot below.

If you click on your account name it will bring you to your wallet page where you can see the various balances of your account. It shows your resources allocations, EOS balance, and token balances. 

Newdex shows the balances of your own private wallet in their site. As we have said earlier DEXs like Newdex do not require user accounts but interact directly with your non-custodial wallet.  There is no need to deposit and withdraw and the user never loses custody of their digital assets. 

Newdex also allows users to have resource-free trades which is equivalent to feeless transactions. This depends on the VIP membership of the trader. New users have a level of 0 VIP which has 10 resource-free trades daily.

Aside from having resource-free trading transactions in Newdex you can also avail of the resource-free transfers using Bloks.io. This site is a multi-purpose site that lets you do a bunch of cool stuff for EOS and its sister chains. Once you connect your wallet into their site you are allowed to have 5 resource-free transactions. This is a valuable tool especially to those who have a modest amount of EOS staked for resources. 

It is not hard to see the immense flexibility and security of non-custodial wallets give to its users. The power of always having total control of digital assets is by far the best way of securing them.

Through this mechanism, digital asset owners can fully attain true ownership of their digital assets. By leveraging decentralized exchanges and non-custodial wallets, they are able to find a safer, fairer and unstoppable trading venue without any of the many risks associated with centralized exchange trading.  

Do not take my word for it, experience it yourself and decide if what I have said in this article are true. Once you have experienced decentralized trading and realize the many benefits it offers you will realize that in almost all meaningful comparison DEXs is far superior to  CEXs. Start with Newdex as it offers one of the most decentralized, scalable, safe and feature-filled DEXs in the industry today.

Transparency Disclosure:
The above article is a commissioned work for Newdex. I was tasked to write an educational article about decentralized exchanges. Total creative freedom was given to me and all the information here came from my own research and of my own opinion based on my experience and knowledge. It has not been edited by Newdex or any of the aforementioned projects in the article.