What sets DEXs apart from CEXs? A deep dive featuring crypto traders and developers
Decentralized exchanges, or DEXs as popularly called, are one of the hottest topics in the crypto space in 2020, growing from niche obscurities as early as 2017 to boasting billions of dollars in daily volumes across 100s of crypto trade pairs this year.
The benefits are multifold compared to “CEXs,” as their centralized counterparts are called. Non-custodial trading, low-fees, full control over fund transfers, and the absence of KYC compliances mean a trading environment more suited to the ethos of cryptocurrencies: That of privacy, inclusivity, and finances not controlled by any particular state or company.
The demand for DEXs — despite a drop in volume in the past few months — has only grown, and even accentuated with the legal troubles faced in October by BitMEX and OKEx, two of the biggest crypto exchanges by volume. And while BitMEX customers didn’t see much trouble, OKEx’s clients were hit by the firm stopping all withdrawals in early-October (they still aren’t active, a month later).
Update Nov. 9:
Withdrawals from OKEx are still paused. User funds remain safe & unaffected. We'll continue to update users on the situation: https://t.co/1fxZsOj6Cj
Oct. 2020's OKB report is live: https://t.co/KYIbddrpZ6
– Avg market cap: $1.47B
– Avg trading volume: $2.48B
— OKEx (@OKEx) November 9, 2020
Using a DEX avoids that scenario entirely. They are secure; have the ability to control your own security versus relying on an exchange’s ability to prevent hacks; cheap, with no deposit/withdrawal fees needed; convenient, with quick trade execution and low slippage; and easy to swap right inside your wallet and no account registration required
While Uniswap has emerged as the most popular DEX by both users and volumes, some new DEXs are already making big moves.
These include Tokenlon, a fast and secure decentralized exchange powered by 0x protocol uses Request’s For Quote (RFQ) architecture to bring decentralized liquidity to the masses, Matcha, also known as the “Robinhood of DEXs” built by 0x Protocol that aggregates liquidity from 0x, Uniswap, Kyber, and Curve, the leading RFQ market maker that provides DeFi traders with the best price on every token swap.
Trends in the decentralized trading space
DEX stakeholders told CryptoSlate about the various trading features that make DEXs a top competition for the future, including how their presence helps the broader DeFi movement.
Lucas Huang, Head of Growth at Tokenlon said that “The self-custody and the ease of use will be the core competitiveness for the DEX. With decentralized trading, users manage their private keys without fear of centralized exchange hacks or counterparty risk.”
“As more and more decentralized finance use cases emerge, more users will start to keep their funds in their wallets. DEXs allows traders to trade right from the wallet, without the need for deposit or withdrawal. Although centralized exchanges have their edge, they cannot compete with DEXs on these two fronts.”
The benefits are not limited to accessibility for new traders, as 0x Labs head of growth Clay Robbins pointed out. “The three biggest features that we believe set DEXs apart are global accessibility, non-custodial trading, and access to any tokenized market,” Robbins said.
“By offering a safer, lower cost, and frictionless way to exchange any form of value, we believe that decentralized trading will help build the foundation of the future DeFi alongside other elements like credit.”
Shane Hong, the head of marketing at KyberSwap, chimed in with thoughts of his own, “Decentralized trading, being non-custodial, immutable, and censorship-resistant, allows users to truly own their assets (‘be your own bank’) while transferring value in a secure and transparent manner, all of which uphold the main ethos of decentralized finance (DeFi).”
“Key trading features in the future would need to account for ease of onboarding for new entrants into the DeFi space. This includes better UI/UX, affordable fiat on-ramps, more robust security mechanisms, easier private key and seed phrase management, and optimal on-chain liquidity sourcing from protocols such as Kyber Network,” he said in a statement to CryptoSlate.
Traders on the features that are most important to them
The DEX teams spoke with traders who used their platforms about what features and elements made trading on non-custodian solutions better than using a CEX.
A trader, who wished to remain anonymous, said, “Safety is not the most critical factor for me. I have used a centralized exchange for several years, and I have not encountered an asset loss event. However, the convenience of decentralized exchanges is a significant advantage. Because I participated in DeFi mining, my tokens are stored in my wallet. When I want to trade, I can trade directly in the wallet without transferring to centralized exchanges.”
It’s not only retail participants with the bouquets. A professional market maker — an individual or entity using algorithms to continually provide liquidity to the market — working on Tokenlon said, “For some trading pairs, the liquidity on a DEX is already comparable to that of centralized exchanges. We are market making on both DEXs and CEXs, so we have witnessed the incredible improvement in DEX’s liquidity this year.”
“We believe the trend will continue, and traders who trade on DEX will no longer need to make a sacrifice in liquidity soon.”
Security concerns still present
Despite the many benefits of using DEXs, security concerns still remain a part of the niche industry. This is partly due to poor code in most cases, such as an attacker exploiting a bug or a rogue developer causing a “rug pull.”
“It is worth mentioning that decentralized exchanges, like other DeFi products, can have technical/code risks. Therefore, before using decentralized financial products, users should try their best to use those that have been audited by a reputable security firm, and have been battle-tested in the market for a while,” said Tokenlon’s Huang.
Robbins of 0x Labs shared the sentiment:
“Things like smart contract security are still a very real threat to user funds and space will need to establish a set of best practices in order to ensure robust audits and safe deployment of smart contracts that can alter user balances.”
But one thing’s for sure: DEXs have arrived and are here to stay.