Juliet BWe talk a lot about decentralized exchange platforms (DEX) but few people really use them. This can be explained by the fact that for a long time, decentralized platforms were not sophisticated enough and lacked volume.
Yet, keep in mind that many people see decentralized exchanges (DEX) as a powerful alternative to the centralized cryptocurrency exchanges (CEX) that currently dominate. This is in line with the “crypto” spirit and the quest for decentralization, which is where crypto holders should be.
To better understand this paradox, we will first return to the explanation of what decentralized exchange platforms are and the difference with centralized exchange platforms.
So here we are going to do a little comparison and see the difference between CEXs and decentralized exchange platforms.
CEX: What is a centralized platform?
A centralized exchange platform like Binance or Kucoin has its own order book. Most of the crypto exchange platforms you know are centralized. For example, Binance, octopuses, Coinbase, Huobi or even OKEx. are centralized platforms. Data is exchanged internally and is stored on dedicated servers. Security processes are then centralized. The centralized platforms will then “control” user deposits.
Very generally, CEXs follow legal regulations. The reason for this is that they also allow trading fiat currencies. CEXs then “need” to be regulated in this sense. For example, they must follow money laundering laws. This is also why identification processors such as KYC are in place. You must disclose your identity in order to use CEXs.
Generally, beginners prefer these platforms. The interfaces are user-friendly and relatively simple to use.
Additionally, one can buy cryptocurrencies directly and withdraw them easily as well. It is also possible to convert them into FIAT and send your capital directly to your bank account. This is a huge advantage for those looking for liquidity.
DEXs: Decentralized exchange platforms
In contrast, decentralized exchanges do not use a central server and the network nodes are distributed. Technically, this means that these exchanges are maintained by the users themselves, in a network.
Among the best DEXs, we can cite DYX, Bisq or even Hegic.
Thus, crypto-centric exchanges are associated with specific blockchains – for example, if it is built on Ethereum, it will only be compatible with ERC-20 tokens.
Crypto-neutral exchanges offer users more freedom because they are not associated with a single blockchain. This will then depend on your personal preferences.
These exchanges are fundamentally P2P because order books, execution and deposits take place directly on the blockchain. One of the striking examples is BISQ. Some users can exchange their assets through atomic swaps (it is a simple transaction between two people who exchange their assets with each other).
In fact, essentially, decentralized exchanges are smart contracts.
Users are required to provide a specific amount of coins or liquidity to execute an order associated with a certain smart contract. Funds are only released when all parties have fully fulfilled their respective commitments. The platform serves as a support and not an intermediary, to put it simply.
What are the advantages of decentralized exchange platforms (DEX)?
✅ L'anonymity
Decentralized exchange platforms only follow the very principle of cryptocurrency….namely being decentralized, transparent and anonymous. DEXs remove the middleman from cryptocurrency trading by providing a peer-to-peer trading process.
What does this mean in practice? This means that transactions can be processed for free (although this depends on the architecture of the DEX in question and its cost), and all transactions can be tracked in the blockchain, but the participants in the transaction cannot be identified because their data is not collected by the platform itself.
If DEX information is leaked, your personal data will not be compromised because you are not required to share it with the exchange to use it.
This is the complete opposite of what happens on centralized exchanges that collect personal data and charge fees for transactions and exchanges. The KYC procedure is almost always applied and your data can be sent to the FISC at any time. This procedure is associated with the collection of exceptional data such as identity documents, photos, etc.
Likewise, I add that in centralized exchange platforms, users do not have their own private keys… And, the money they hold on the exchange is under the total control of the company, this which is not the case with DEXs.
✅ Better security
Centralized exchanges have a very simple structure. This makes them more vulnerable to hacker attacks. Besides, I imagine you have already heard the many stories of hacking that have occurred on different platforms. Should I talk about the MtGox and Karpelès affair?
DEXs are more technically sophisticated, making them a harder target for hackers.
Additionally, there is less volume of money on DEXs, so this is another factor that makes decentralized exchanges less attractive loot for thieves.
As was said above, thanks to the anonymity of decentralized exchanges, even in the event of a hack, users do not have to worry about their personal data being leaked. Their identity cards will not be found everywhere on the Dark Web for example.
But be careful, it's not a village party. DEXs are sometimes hacked too. Hackers can use smart contract breaches to steal money. It is rare and difficult but it remains possible.
One of the cases was crazy with the story of a hacker who managed to steal a truly huge amount: in 2018, $23,5 million worth of cryptocurrencies were stolen from a decentralized exchange called Bankor Network.
👿 Note: This terrible theft did a lot of damage to the reputation of decentralized exchange platforms. People said to themselves that it was also dangerous in the end and that it was therefore preferable and equivalent to going to a centralized platform.
✅ Lower fees
A large number of trading pairs take place through the DEX network, which reduces trading fees on DEXs.
Some users use a different method: a person proposes a trade, the transaction is signed, and the order book is added to the blockchain when both parties reach an agreement. This is when coins are exchanged between buyers and sellers' wallets. The exchange does not require any fees. This is what makes DEXs cheaper to use, as fees are either non-existent or very low.
Centralized exchanges are user-friendly and reminiscent of traditional trading sites while DEXs are less user-friendly and less convenient for most people.
Additionally, centralized crypto platforms have a small selection of trading instruments. Likewise, DEXs do not support fiat money. You know, many people directly deposit their EUROs on the platform to buy cryptocurrencies and carry out their trading sessions. It's still a useful feature (even if it proves expensive in terms of fees).
What are the disadvantages of decentralized exchange platforms (DEX)?
(I.e. Some DEXs are actually relatively “centralized”«
Sometimes, the decentralization of supposedly decentralized exchanges is questioned by those in the know. For example, Bancor, which was mentioned above in the hacking case, managed to freeze its users' assets using a smart contract. Given an allegation that Bancor was the sole "organizer" of the market, we can assume that this decentralized exchange is quite centralized. Or, it can be in extreme cases….
Another case shows that sometimes, centralization is not far away. For example, we can cite the decentralized platform launched by Binance.
Some people indeed consider that the platform DEX launched by Binance is rather created to increase the trading volume of BNB because many trading pairs on this DEX are associated with this token and it is difficult to avoid delaying peers without passing through.. The intentions of the DEX developers are therefore not always as pure as they are claimed.
It is worth mentioning that it is not always clear how much profit DEX developers make from their product.
(I.e. (too?) low liquidity
For years, decentralized exchange platforms had very low liquidity. There are many reasons why few users use DEXs, as discussed earlier in this article.
Low liquidity causes serious problems for DEX users. Prices on DEXs can differ significantly from those on centralized exchanges. Sometimes it takes time to find a matching order. This circumstance creates additional risks. The high liquidity of the largest centralized exchanges makes trading much faster and safer (because you buy and sell at relevant prices as you find matching buyers/sellers).
Low liquidity becomes a problem that is really burdensome as exchanges with small trading volumes attract fewer traders and liquidity becomes even lower. It's the snake that bites its own tail. Traders do not like to post orders in platforms with low liquidity because their trading strategy may not work under these conditions. Yes, low liquidity implies fewer orders, and therefore, the possibility that the order will not be placed, due to lack of buyers or sellers for example.
Likewise, some people are used to having more trust in authority (like banks, etc.), so they feel better when they know that the service is under the control of an entity, of an organization with a management team, etc.
Another reason is that DEXs use many protocols and it is not always interesting for the general public to understand how this or that decentralized exchange works while centralized exchanges tend to provide a clear, intuitive interface.
Basically, it's as if DEXs were intended for connoisseurs, nerds and geeks (this is said in a neutral way, without any pejorative meaning, I want to make it clear). While CEXs are more suitable for the general public, to put it another way.
(I.e. Limited functionality with a complicated interface
Personally, this is what repels me the most, even though I have been in the world of cryptocurrencies for a long time.
Beyond the more "rough" interface, it is also the lack of features that explains people's lack of enthusiasm for decentralized exchange platforms.
For example, Kraken provides a margin trading option for those willing to trade with leverage, Coinbase supports fiat money making crypto trading more accessible to everyone, HitBTC has a tutorial tool practice known as demo mode which can also be very useful for beginners.
Large centralized exchanges provide ways to protect yourself from known issues in trading (stop-limit orders, etc.), there is also the ability to easily integrate (no code) trading bots, sophisticated charts, trading tools, etc.
The interface is generally very intuitive and easy to understand.
Unfortunately, none of the things mentioned above are generally available on decentralized exchanges.
🛑 A complicated interface (especially for beginners)
The interface is generally not user-friendly, few cryptos and tokens are supported (fiat currency is not supported), and only basic trading functionality is presented on DEXs.
The reasons for the lack of functionality may be different. For example, it could be a lack of finance on the part of the development teams. Likewise, the fact that there are few users does not lead to greater profits (plus the transactions are free), which means that there is less opportunity or need to add more of functionalities.
Likewise, we must remember that DEXs only appeared in 2015. It is still very new. We can even say that due to the lack of publicity concerning them, they have not yet met their audiences.
And, finally, even if we don't use fiat currencies that much in enchants, without government approval, DEXs will not be able to legally work with FIATs. Which remains a major obstacle for many crypto traders...
(I.e. Security concerns
I wrote that DEXs provide better security in general. Which is true, in terms of the number of hacks appearing on these platforms. However, there are other security issues I need to mention. For example, few DEXs have insurance for user accounts.
If you lose your money, in many cases there is nothing you can do about it. There will be no compensation and no one will be prosecuted. However, CEXs no longer have any more guarantees…
As DEXs do not collect money directly (do not take fees for transactions), they do not have capital that could compensate for assets stolen from users.
On the DEXs, security rests on the responsibility of its users themselves.
On the contrary, centralized exchange platforms very often provide opportunities to be reimbursed for losses in such situations, even if this is not always the case in practice….
Conclusion: What are the advantages and disadvantages of decentralized exchange platforms?
So, in absolute terms, decentralized exchange platforms are excellent and authentic to the cryptocurrency paradigm. In absolute.
If you look closely, you may notice many flaws or gaps.
It is certainly the fact that it is still very new in the world of cryptocurrencies and that CEXs have enough money and power to promote their platforms.
Many crypto-enthusiasts (including myself) assume that over time, DEXs will advance and one day they will become much more efficient and comprehensive.
We don't know how long this will take. Still, today, it is centralized exchange platforms like Binance who have a monopoly. We can understand it, by the way, these platforms offer all the tools that users need.
The advantages of decentralized exchange platforms:
- Transactions are free
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Transparent processes
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Anonymity, no KYC
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Better overall security
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You own your private keys and your cryptos.
The inconvenients :
- Low liquidity
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The negotiation process is slower
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Trading and exchanging large amounts of crypto is impossible
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Unpleasant interface, not very user-friendly (until today)
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Limited functionality compared to CEXs
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Fiat currencies are not supported
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Currency prices are unstable
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No compensation for losses incurred if there are losses.
This is not financial advice. Always do your own research.
