Decentralized vs Centralized Exchange Battle — Is It Future Against Past?

Can decentralized exchanges replace centralized ones? This question is alike with another one whether cryptocurrencies can replace fiat.
It seems like the philosophy of decentralized exchanges suits better for crypto trading. However, CEXes are still more popular. In the meantime, most of the major CEXes have announced or released DEXes. Thus, the question of whether DEX can replace CEX has to be disclosed.

What Is DEX?

DEX (decentralized exchange) is an exchange on which all trading operations are executed on the basis of smart contracts, users gain full control over their wallets and all the deals are made directly within users without an exchange as an intermediary.

Here is the mindmap visualizing the way decentralized exchange works:

There are many exchanges that call themselves decentralized, though they are not. In order to be called a decentralized exchange should possess the following features:

  • Wallet or account belongs to you — that means you do not create the wallet on the exchange. You add the one you already own. Even if you can create an account on the exchange page it still should belong to you and stock mustn’t have rights to limit your access to it.
  • Trading deals are executed on the basis of smart contracts and processed on blockchain — thus, in case you create an order and another user responds it, the exchange cannot cancel, modify or impact it in any other way as it is processed on the blockchain.

DEX advantages:

  • Anonymity — you do not undergo the KYC process.
  • Full control of your funds — your wallet and your funds stored on it belong to you and store on your wallet, not on the exchange wallet.
  • Security — your login data, your funds are not stored on the exchange servers, thus your account cannot be hacked.
DEX disadvantages:

  • There are no advanced trading tools — margin trading, stop loss, trading robots, etc.
  • It is impossible to recover access to the wallet if you have lost login data
  • It is impossible to cancel the operation if you have made a mistake during the address or amount of funds input.
  • DEX listing can only contain assets that support smart-contracts
  • Slow order processing — it can take minutes or hours to complete the deal — it depends on the network load.

DEX Example

One of the best DEX examples is EtherDelta that operates on the Ethereum blockchain. You can create an account on the EtherDelta in a single click.
You do not need to input your sign up data, confirm email - nothing of it. Once you create an account there is an Ethereum wallet created for you which you can use to store ETH. After you complete the deal you can withdraw funds and delete an account immediately.
There are no advanced trading features here, however, this exchange is ideal to be used as a platform to exchange one crypto on another.

What Is CEX?

CEX (centralized exchange) is a concept that considers the processing of all operations on exchange servers, the user account, and his wallet are owned and controlled by exchange and leased to the user on the specified conditions.

There exists a great number of centralized exchanges with different functions and features — there are many more CEXes than DEXes. For example, NYSE, Forex and many other exchanges are centralized. When it comes to crypto exchanges, the difference is only in the fact they were initially considered for cryptocurrency trading.

The way CEX operates can be visualized in a mindmap:

CEXes can grant users more opportunities that DEXes. Exchange can be called centralized if it can realize the features listed below:

  • Account creation, and funds storage on the wallet that belongs to the exchange.
  • Deals are executed on the exchange servers.
  • Advanced trading features — futures, margin trading, automated trading, stop losses, etc.
CEX advantages:

  • A wide range of features — having a large number of advanced trading features provides many options for exchange users to earn.
  • An ability to buy crypto for fiat.
  • An ability to add to the listing any kind of assets.
  • Support service that can solve any issue — starting from account access recovery to cancellation of trade orders.
CEX disadvantages

  • Assets prices can vary and depends on the administration discrete.
  • Security issues — there are at least several hacking reports released by exchanges annually.
  • Deanonymization — each exchange demands from the user to undergo a verification process.
  • Trading limits enforced — it depends on the user verification stage.
  • Exchange downfall risk — this happened several times when exchange did not manage to cover expenses from deals completion.
  • Risks related to the absence of proper crypto exchange regulation.

CEX Example

Currency.com — is a genius example of the CEX with a long listing of assets and some of these assets are not presented on other exchanges yet. Along with crypto, one can also trade here with tokenized:



  • shares
  • Belarus government bonds
  • commodities (gas, oil, gold, etc.)
Exchange demands from users to undergo full KYC&AML, user verification, there are enforced advanced trading tools (in particular, leverage trading). There are also tools for investment portfolio management and activity analysis.
There are many more trading pairs here than on any DEX, more opportunities for traders to earn and options for depositing/withdrawal. However, there are still many users that prefer DEXes.

CEX vs DEX

Centralized exchanges better fit for trading due to the wide range of functions available and the fact there can be added an unlimited amount of assets while decentralized exchanges are more secure for users and better suit for exchange of cryptos and tokenized assets. Thus, if you choose an exchange to work on here is a basic approach:

CEXes to earn
DEXes to exchange

That’s how it looks like today but how it is going to be in the future?

Can DEXes replace CEXes?

The idea of replacing CEXes with DEXes is very attractive. This would close once and for all fraud, security and trust issues. The majority in the crypto community think it will happen soon and they are likely to be right.

In order to replace CEXes, DEXes must cover all the basic demands of exchange users which mean they have to enforce the same advanced features for traders, be able to widen the list of trading pairs and comply FATF demands. Thus, exchanges need to develop a decentralized analog of advanced trading features and implement KYC.

In order to provide proper KYC procedures, DEXes can use third-party service providers like Telegram.Passport. This means the user can create orders on an exchange only after he gets authorized with a service that stores and verifies his data.

In order to add advanced trading features and remain decentralized, an exchange has to realize these features on the blockchain (which is possible when the scaling issue is solved). There also have to be provided clearing and order closure on the principles of decentralization. That is what the main problem may arise with. In particular, due to the high volatility of crypto and tokenized assets.

Conclusion

It is doubtful that DEXes will completely replace CEXes. It is more probable that CEXes will find their niche in the future. For example, as marketplaces for assets that do not support smart-contracts. The way DEXes from majors like Bitfinex (EOSfinex) and Binance (Binance DEX) will perform can have a great impact on the future of decentralized trading.
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