Exchanges representing platforms in the field of DeFi and operating on the basis of a blockchain (distributed registry) are called decentralized (DEX exchanges). Their servers do not store personal data and users’ cryptocurrencies. They are exclusively a tool for finding matches for user requests for the exchange/sale/purchase of assets. You need to understand that on some platforms, the possibility of stacking is additionally implemented. The process of trading on DEX is carried out without intermediaries, that is, peer-to-peer.
They are controlled by DEX automatically (smart contract) or semi-automatically. Such exchangers do not have a unified management system, there are no registration requirements, and various important decisions are made with the active assistance of community members.
Ethereum is one of the most popular blockchain networks in the DeFi (decentralized finance) industry today. However, it is characterized by rather high commissions, which was the reason for the withdrawal to the upper stages of the popularity of exchanges that operate in the Binance Smart Chain (BSC). There are 2 main differences between these networks:
- Ethereum platforms – work directly with ETH, as well as with the ERC-20 standard
- Exchanges in BSC support the VER-20 standard
The Main Differences Between CEX and DEX
Centralized (CEX) exchanges should be understood as traditional exchangers managed by senior management, whose responsibility is to:
- Ensuring the safety of confidential user data;
- Monitoring the transaction history registry;
- Monitoring the operation of the platform itself;
- Unanimous acceptance of important decisions for the community.
The list of SUCH platforms includes stock exchanges (for example, Moscow), as well as crypto exchanges (Bybit, FTX, Binance, etc.). They do not allow trading anonymously. So, in order to make transactions on stock exchanges, a trader is required to open an account with a broker. Work with cryptocurrency projects is characterized by the passage of the mandatory KYC verification procedure.
Definitely, there are crypto exchanges that allow not to pass verification, but users, in this case, should be prepared for some restrictions. So, for example, without going through the Binance verification procedure, you will not be able to trade peer-to-peer, but you will be able to use the platform for cryptocurrency input/output. In addition, trading in tokenized shares is prohibited on Binance and FTX.
As for DEX exchanges, they do not have a common management body at all. To conduct trades on decentralized exchanges, you do not need to register and pass verification by KYC. Accordingly, the exchange servers do not store the personal data of users. You can start trading on the DEX exchange immediately after opening and connecting a wallet for storing cryptocurrency. Finances are not stored on the exchange itself, so the responsibility for the safety of funds falls entirely on the user.
Trading on DEX platforms between users is carried out directly – in the P2P format. The commission is charged exclusively for the transaction (no commission is charged for the placement and withdrawal of cryptocurrencies). The amount of the commission directly depends on how busy the blockchain network is. At the same time, there is no intermediary between the bidders who would charge additional commissions. This explains the lower commission level on DEX exchanges than on CEX. But this is only theoretically, in practice, with the maximum network load, the commission amount can be quite high.
Pros and Cons of DEX
Summing up all of the above, we will highlight the main advantages and disadvantages of decentralized DEX exchanges.
Of the advantages, it is worth noting:
1. Anonymity
There is no need to go through the registration and KYC verification procedure.
2. Financial security
Cryptocurrencies are not stored on the servers of DEX platforms, therefore any unpleasant financial consequences, even with DDoS or even with the collapse of the exchange, are excluded.
3. There is no common entry point
These sites operate on the basis of distributed registry technology so that hackers do not have the opportunity to carry out hacking, which in turn makes hacker attacks meaningless.
There were also disadvantages, which are:
1. Limited functionality
Namely, in the absence of the possibility of setting a Stop Loss, margin trading, and so on.
2. Low level of liquidity
Compared to centralized exchanges, there is less liquidity pool on decentralized exchanges, which explains the high risk of slippage.
3. Work without support service
Which is explained by the lack of a single guide. Consequently, there is also no technical support on decentralized exchanges.
And one more thing: due to the fact that many decentralized DEX crypto exchanges are managed by smart contract, a crypt that does not support interaction with smart contracts cannot be traded on such platforms.
It is also worth emphasizing that due to the fact that developers do not participate in the listing of tokens on DEX, such exchanges sometimes face the spread of fake tokens. So, if you are going to trade tokens, it is recommended to perform a preliminary reconciliation of the project data on CoinGecco and CoinMarketCap.
As you can see, there are difficulties too. DEX platforms, on the one hand, are considered more reliable and secure in comparison with centralized ones. But if we turn the coin on the other side, we will see that decentralized exchanges are an option more suitable for experienced users who are able to independently take responsibility for their own actions and funds, without relying on the help of the support service. It is also impossible to keep silent about such a factor as unauthorized withdrawal of funds, which users face on some more vulnerable platforms, such as Bancor.
Regulation of Decentralized Cryptocurrency Exchanges
In America, regulators have tried to apply the current legislation, but Singapore is determined to develop a completely new legislative framework for dealing with DEX. At the same time, there is still no clear position in either state on this issue.
As for other states, such crypto exchanges are not regulated there at all. The main difficulty associated with their regulation is the absence of specific regulators from both individuals and legal entities. This entails difficulties in identifying possible violations and in order to identify the responsible person when they occur.
What Is The Future For?
Experts tend to believe that CEX platforms will eventually begin to implement the functionality of DEX exchanges. Therefore, in the future, online exchangers will be able to offer the user a “golden mean”, namely the advantages of both variants of crypto exchanges.
Today, decentralized platforms are the most successful solution for mass servicing of crypto holders.
However, there are still difficulties with scaling the blockchain, as well as the mass use of crypto funds. Moreover, in order to attract as many users to DEX as possible, exchanges will first of all have to work on improving the interface. And as long as these issues remain unresolved, decentralized exchanges are more likely to remain a specialized product designed for a limited audience.