Cryptocurrencies leverage blockchain technology to gain decentralization, transparency, censorship resistance, and immutability – which are the traits that make crypto so revolutionary and is the reason we invest in them.
However, though cryptos have a decentralized nature, we trade them on centralized exchanges… which doesn’t really make sense, does it?
So why is that? Why do we trade decentralized money on centralized exchanges?
Well for starters, centralized exchanges (CEXes) offer the following benefits over decentralized exchanges (DEXes):
Benefits of Centralized Exchanges:
- Faster transaction settling
- Greater liquidity
- Better user interface (UI)
- Better user experience (UX)
- Variety of fiat on-and-off ramps
- Wide variety of crypto trading pairs
- More features (futures trading, margin trading, spot trading)
Based on the benefits above, it’s easy to understand why centralized exchanges overwhelmingly dominate the market with trading volumes making up nearly 99% of the market while volume on DEXes amounts to less than 1%.
However, as crypto investors, we very well know that trends don’t last forever. They do change, and I can tell you now, that the crypto exchange landscape is slowly changing with growing DEXes.
Growth of the DEX Landscape
While CEXes currently dominate the crypto market, the use of DEXes is most definitely trending upwards with significant growth in volume and the number of trades.
For instance, the 0x open protocol – a DEX protocol that enables the peer-to-peer exchange of assets on the Ethereum blockchain by powering decentralized exchanges – has seen a significant rise in volume from the beginning of 2020.
1 Year 0x volume data from 0xtracker.com
Additionally, the number of 0x relayers is growing too. The protocol has 28 active relayers in the past year and the number 1 relayer is now achieving $46 million in monthly trading volume.
Another DEX protocol showing significant growth comes from Kyber Network – an on-chain liquidity protocol powering instant and secure token exchanges in any decentralized application.
Kyber Network recently reached a peak of $27.3 million in 24hr volume on March 12, 2020, and overall volume continues to rise.
1 Year Kyber Network volume data from tracker.kyber.network
Moreover, apart from these established DEX protocols growing in volume, new DEXes are coming to the market as well.
Binance – the world’s largest cryptocurrency exchange by trading volume has launched its own decentralized exchange, Binance DEX. Another CEX that launched a DEX is Bitfinex, who launched the DeversiFi DEX.
That said, some of the biggest and most successful centralized exchanges are attempting to make their stance in the decentralized exchange market, indicating even further growth in the DEX landscape.
DEX vs CEX - Benefits and Tradeoffs
I already outlined the benefits of CEXes over DEXes above, but what are the tradeoffs? Below I highlight some of the biggest issues with centralized exchanges, in which decentralized exchanges solve.
Issues with Centralized Exchanges
- Vulnerable to hacks and attacks (users can lose their crypto as well as sensitive identifying information).
- Must be trusted (CEXes can pull an exit scam overnight and steal everyone’s money or sell sensitive user data).
- Users cannot stay anonymous (CEXes often require users to provide identifying know-your-customer (KYC) information).
- Limits on how users control their money (deposit and withdrawal limits).
- Server downtimes and unexpected “maintenance periods” (traders cannot access their funds or trade).
All of the above-mentioned issues with centralized exchanges are near impossible to solve with the CEX model. But with the DEX model, these CEX issues are already solved natively.
Therefore, DEX benefits are the inverse of CEX issues and CEX benefits are the inverse of DEX issues.
However, the big difference here is that centralized exchanges cannot really solve their issues, while decentralized exchanges can and are solving theirs.
DEXes competing with CEXes
Loopring.io – a DEX powered by the Loopring orderbook-based DEX protocol – is already competing with CEXes when it comes to transaction speed and matching orders. The Loopring protocol is capable of processing up to 2,025 trades per second by batching thousands of transactions together via zkRollups and verifying them off-chain via Zero-Knowledge Proofs.
Uniswap.Exchange – a fully decentralized protocol for automated liquidity provision on Ethereum – provides users with a user-friendly instant token exchange experience.
StellarX – the first decentralized crypto platform with global fiat gateways – enabling users to Bitcoin, Ethereum, and other cryptocurrencies for crypto, fiat tethers, commodities, bonds, and more.
Each of the above DEXes is laser-focused on improving specific aspects including throughput, speed, UX, and fiat on-and-off ramps which enable them to compete with CEXes. Therefore, if you were able to magically clutch all of these existing DEXes into one, it could be even better than many CEXes.
The decentralized exchange landscape is growing as DEX protocols improve upon and solve the issues currently plaguing DEXes. That said, it’s only a matter of time before DEXes provide better trading experiences than CEXes, and once that happens, there will be no going back.
As cryptocurrencies are decentralized by nature, it only makes sense to trade them in a decentralized manner through peer-to-peer transactions that are automatically settled on a distributed ledger.
DEXes are something that the crypto industry deeply desires and DEX protocols like Loopring, Kyber Network, and 0x are making them a reality.
Have you ever traded on DEX? What needs to happen for you to start buying, selling, and trading cryptos solely on DEXes? Let me know in the comment section below.