CEX v DEX: The Battle of the Exchanges
Whew, guys! What a night it's been!
Yesterday, I stayed up late watching the Oscars, and this morning, I spent the entire morning cleaning the Pepsi and popcorn I had spilled all over my sofa after that phenomenal moment we shall not name. Things got pretty heated there for a bit, didn't it? One minute I was looking at all these fancy movie stars walking the red carpet and then the next, it was like I had a ringside seat at WWE and The Undertaker was in full force. Man, I didn't see that coming.
Anyways, guys, so I was sitting on the edge of my seat, hollering at the television last evening, when it hit me- maybe we could spend some time today chatting about another face off, this one, a battle in the crypto-verse, the battle of the exchanges- Centralized vs Decentralized Exchanges.
A centralized crypto exchange is an online platform which acts as an intermediary to facilitate trade in cryptocurrencies including the purchase and sale of cryptocurrencies with fiat or other cryptocurrencies as well as margin and futures trading. Most persons just entering the cryptocurrency space begin with trades on a centralized exchange. Popular exchanges include Binance, FTX, Gemini, Coinbase, Kucoin and others.
There are quite a few advantages to using centralized exchanges. Some include:
For the uninitiated in the crypto space, centralized exchanges tend to be relatively user friendly with some platforms even providing learning spaces as well as simplified or lite versions or their pro-platforms for novices.
Centralized exchanges can be reliable in that you are less likely to be exposed to scams and rug pulls than on a decentralized exchange. For some years, for example, Coinbase enjoyed a reputation titled the Coinbase Effect which, in essence, meant that as soon as the exchange expressed interest in listing a coin or a token, its price skyrocketed. This was because investors trusted in the organization's legal review, risk assessment and overall selection process, a process which does not exist on decentralized exchanges.
Because they are far more popular and more user friendly, and for myriad other reasons, centralized exchanges tend to have more liquidity than decentralized exchanges. This can protect against the unanticipated additional costs which can arise on a decentralized exchange as a result of slippage if there is insufficient liquidity.
Transactions on centralized exchanges are usually completed in milliseconds and so the speed of transactions as compared to decentralized exchanges also contributes to a better a user experience.
There are some disadvantages to trading on centralized exchanges as well. A few of these include:
There's a popular saying in the cryptoverse: Not your keys, not your coins. This is in direct reference to the custody of your funds on centralized exchanges. To trade on a centralized exchange, you must entrust control of your crypto to that third party and the exchange can then determine how much or how little crypto you can withdraw at any given time. In fact there have been instances where persons have complained of having their accounts frozen and losing access to their funds altogether once they were stored on a centralized exchange.
Security and the risk of being hacked is a huge concern for traders on cryptocurrency exchanges. For example, according to an NBC News report in December 2021, hackers made off with almost $200 million from cryptocurrency exchange Bitmart. Later, in January 2022, Crypto.com confirmed that it had lost over $30 million in Bitcoin and Ethereum as a result of a hack. Over the years, there have been many other hacks on other exchanges.
Some centralized exchanges have also been excused of wash trading, and price and volume manipulation. According to an article published in the New Scientist in November 2021, "As many as seven in ten cryptocurrency trades on the world’s most popular but unregulated exchanges may be people buying from themselves."
As its name implies, a decentralized exchange operates without a third party. According to a CoinDesk definition, "decentralized exchanges are blockchain-based apps that coordinate large-scale trading of crypto assets between many users" through automated algorithms which trigger transactions when given certain inputs.
Decentralized exchanges include Uniswap, SushiSwap, Pancakeswap, dYdX, SpookySwap and many others.
Unlike centralized exchanges, decentralized exchanges do not provide custody for a trader's funds. Transactions are conducted directly from a trader's wallet so that at all times, the user is in total control of his or her funds.
Traders can access a wider array of cryptocurrencies, some before they are even listed on centralized exchanges.
Traders benefit from a higher level of privacy when conducting transactions on DEXs than can be afforded on a centralized exchange.
Disadvantages of trading on decentralized exchanges include:
There is no regulation or oversight and so traders seeking to acquire cryptocurrencies before exchange listings are more vulnerable to scams and rug pulls from shady developers than on centralized exchanges.
I have found, personally, that the fees on decentralized exchanges are high, transactions can be impacted by slippage because of liquidity issues, and cancelled transactions are costly. This was a huge deterrent for me.
I also felt the process of wrapped coins and cross chain bridging to access coins and tokens across different exchanges was not as user friendly as I would have liked. It was too complicated and costly, and so, some traders would just forego the complications altogether for a simpler, faster, cheaper transaction on a centralized exchange.
There are no additional margin and futures trading opportunities on decentralized exchanges.
And so, guys, when it comes to choosing between centralized and decentralized exchanges, I use both for their advantages and I am mindful of the risk and shortfalls of each model.
As a trader, I use centralized exchanges for margin trading and, lately, I have tried futures as well. Sometimes though, I may use a DEX to acquire coins not yet listed on an exchange. Unfortunately, this practice has cost me a pretty penny and I have a few useless coins in my wallet with zero liquidity as a result.
But tell me, guys, when it comes to a face off between centralized and decentralized exchanges which model do you prefer? What are some of the advantages and disadvantages of each that stand out to you? I'd love to hear your views.
Well, that's it, guys, I'm off again in a quest for a new story. Until we meet the next time, please be safe. And remember, if the markets throw a punch at you, well... duck! Arrivederci!
This article was first posted on my Publish0x account under the pseudonym iHODL.
Image courtesy Pixabay