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DEX competition between centralized crypto exchanges

Centralized-vs-Decentralized-Cryptocurrency-Exchanges

Introduction

Exchange: A place to trade cryptocurrency.

Centralized Exchange (CEX): a type of cryptocurrency exchange that is operated by a company that owns it in a centralized manner.

Decentralized Exchange (DEX): a platform for exchanging cryptocurrencies based on functionality programmed on the blockchain (i.e., in smart contracts). The trading is peer-to-peer, or between pools of liquidity.

The report also noted that despite the DEXs’ growth, large-sized centralized exchanges remain an important market player.

Large centralized exchanges, including derivatives, spot, fiat-to-crypto and crypto-to-crypto, grew significantly in value received between August 2020 and August 2021.

“As cryptocurrency adoption grows, most new users will acquire their first cryptocurrency through centralized exchanges, as these are typically the easiest services to exchange fiat currency for different types of cryptocurrencies,” the report said.

Another interesting trend is that a larger number of unique crypto assets available on a platform correlate with higher transaction volume. But bitcoin and ether remain the most traded tokens on exchanges overall.

Centralized Exchange (CEX): Pros & Cons

While centralized exchanges are widely considered less secure than their decentralized counterparts because they store user funds, they come with an array of features and benefits that drive users towards them.

Pros

  1. Trading Volumes

Centralized exchanges are typically highly liquid. Binance, for example, regularly records more than $30B in daily trading volumes. For newbies, these active platforms essentially guarantee that their assets can be exchanged seamlessly at any time. For experienced traders, CEXs provide a way to move relatively large amounts of funds in and out within minutes.

  1. Fiat/Crypto and Crypto/Fiat Currency Conversions

Centralized exchanges typically support fiat to crypto on and off-ramps, meaning that they allow you to buy bitcoin with US dollars, for example.

  1. More Features

Aside from the vast array of digital assets that CEXs support, they offer a lot more features other than exchanging one asset for another, such as margin trading, crypto derivates trading, exchange staking, and margin lending, among others.

  1. Ease of Use

One endearing quality of most CEXs is the user interface. Considering that most newbies are unfamiliar with crypto pairs or simple terms like ‘going long or short,’ CEXs do a great job funneling users into the crypto space. Some CEX platforms, like Binance, have lite versions for users looking to make basic trades. Moreover, they function almost in the same way as online brokers, thus acting as a familiar face to traditional investors.

Cons

While centralized trading platforms offer many of the benefits investors are used to from their online brokerage accounts, they come with a handful of significant drawbacks.

  1. Strict Know-Your-Customer (KYC) Policies

For users looking to maintain privacy while trading, a CEX is not the go-to exchange. Centralized exchanges are subject users to strict KYC policies. They typically require you to upload a photo of your face and a valid identity card to buy and sell crypto or make withdrawals.

  1. Not your Keys, Not your Coins

While CEXs provide easy trading, high liquidity, etc., their wallets are custodial, meaning that they hold authority over your crypto. A crypto wallet should be non-custodial. Going by the famous phrase “not your keys, not your coin,” it is safe to say CEX wallets create a security risk for traders and investors.

  1. Hacks

We have borne witness to several infamous crypto exchange hacks with exchanges losing billions of dollars over the years. As exchanges hold user funds, they are prime targets for cybercriminals looking to get their hands on cryptocurrency.

Decentralized Exchange (DEX): Pros & Cons

Decentralized exchanges have taken a substantial share in the crypto trading market as a result of increasing user-friendliness and growing understanding among crypto users about the importance of keeping control over one’s private keys.

Pros

Several features attract users to DEXs, including:

1. Privacy and Anonymity

Using a decentralized exchange typically only requires you to connect your wallet and sign a transaction. No identity verification process is required.

2. Security

Decentralized exchanges are generally more secure than centralized exchanges for two reasons:

  • They are non-custodial:Hackers target exchanges to access the central database and extract users’ private keys and withdraw their funds. Since DEXs do not hold your private keys, hackers cannot get into your wallet.
  • No identity checks:No risk of leaking private user data.
3. DeFi and NFT Integration

DeFi and NFTs are the two frontiers of the blockchain space, and DEXs are strong propellers. DEXs allows users to access the world of smart contracts and DApps that provide financial services, including lending and savings products, as well as NFT projects.

Cons

While decentralized trading venues provide some substantial advantages over centralized exchanges, they also have drawbacks new crypto investors need to be aware of.

1. Limited Trading

DEXs are currently limited in functionality. Features like margin trades, limit orders, futures, options, etc., are typically unavailable.

2. Efficiency

Decentralized exchanges are not as fast and efficient as CEXs due to the scalability issues faced by most blockchains. Centralized exchanges are not faced with this problem because they use both on-chain and off-chain mechanisms to ensure they run smoothly.

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