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Ridiculous fees apart, using decentralized exchange services have been a real fun! Sometimes I wish every token will be bridged to Fantom blockchain! Well, just a wish but the high speed and cheap transactions on my favourite cross chain network is just amazing. Using DeFi services on these platforms where fees and efficiency issues are fixed brings a true feel of decentralization.
The comfort, the security, the speed…oh well, just many things! DeFi protocols are mavericks and makes centralized exchanges look so ancient despite being just about a decade old, lol.
My frequency of using centralized exchanges has decreased over five times the initial. If we can get rid of fake volumes, centralized exchanges are obviously bowing down to decentralized exchanges; in terms of volume, user base and application.
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Fact is, centralized exchanges aren’t even real competitions to contemporary decentralized exchanges the difference is clear. Mainstream trading system will probably get usurped by DeFi protocols.
In addition to decentralization, security and efficiency; Automated Market Maker, the protocol powering trading on decentralized exchanges is the main technology poised to put centralized exchanges to rest. AMMs are built to ensure organic liquidity and create real time trading effects. Unlike centralized exchanges, AMMs are all shade of good. In the real sense, it’s AMMs Vs CEXes!
Despite years of efforts and modifications, fake volumes have continued to bite down on the reputation of centralized exchanges. Aided by exchange officials or solitarily, cryptocurrency projects could easily fake buy and sell orders to lure investors who are attracted by high volumes as a proof of demand and liquidity.
This fake liquidity and high demand would quickly dry up as soon as the manipulation ends. Well, if the manipulation was able to lure enough investors and traders, then the decline will be gradual. If the project is unable to drive real demand, the liquidity dries up once again. Investors are only left to mourn their losses in cases like this…the ripple effect continues.
Apart from projects luring investors with these volumes, exchanges as well adopt this strategy to boost their numbers and attract users. Exchanges or cryptocurrency projects…I can’t tell who did this first.
Trading and liquidity manipulations on centralized exchanges also tarnish the organic effects of buys and sells. High volumes of huge buys, yet very little effect on prices. Unfortunately, these positive effects are wiped away by relatively lesser sell orders. Everything looks programmed! For unstable projects, this phenomenon is even clearer.
Inability to estimate the depth of the liquidity pool and the effects of buys and sells on the price makes trading harder and less fun. I’m no trading expert, but being unable to access the originality of the trading activities for a particular token makes trading unthinkably tough.
Centralized exchanges and their technology have served for the time they dominated the space. No doubt, they flourished due to the incredibly handy services they offered. In essence, these services were the best available.
In contrast, Automated Market Markers, despite not being without their own shortcomings are programmed to be highly organic and responsive. Like a real-time trading system, every bit of supply and demand create a relative effect. Traders and investors are handed efficient tools for making decisions and projects are represented for what they truly are…at least for that point in time.
Thanks to liquidity pools, AMMs provide a basket of exchangeable assets to enable unrestricted trading for the period which the liquidity providers wish to leave their assets on the pool. The transparency of the liquidity pool allows traders make their decisions.
AMM protocol ensures that every buy and sell effects reflect relatively on the asset price. AMMs are not completely resistant to manipulations, this is evident in the rampant rug pulls. But on the brighter side, these actions are transparent; an important feature of blockchain technology.
Smart contract technology also creates an avenue for ‘liquidity locking’. This solves rug pulls to an extent. Liquidity locking ensures that provided liquidity cannot be removed for the period of time specified in the locking process.
It’s not just centralized exchanges; trading systems around the world will surely adopt AMM strategies sometimes in the near future. In my opinion, it is the future of trading and exchange.