There are two exchanges types in the cryptocurrency market, centralized exchanges (CEX) and decentralized exchanges (DEX). Each model has its benefits and drawbacks, which we will review in this article and try to predict the future of cryptocurrency exchanges.
Centralized exchanges (CEX)
Although cryptocurrencies are decentralized based, the first versions of cryptocurrency exchanges were all centralized. CEXs are trading platforms that operate the same as traditional exchange offices or stock markets. Some of the main features of centralized cryptocurrency exchanges (CEX) are:
- CEX is owned by a company
- Operation is carried out by a third party
- Customers do not possess their private keys
- Trading to fiat currency is available
- Security rules such as Know Your Customer (KYC) and anti-money laundering (AML) are usually mandatory
- Market makers and takers are on the exchange and an integral factor of trading
Those are the main features that are common among all centralized cryptocurrency exchanges. The most noticeable features of CEXs are the control of a third party over all the transactions and not having access to the private keys. This model of cryptocurrency exchanges has its advantages and disadvantages:
- They usually allow users to exchange fiat currency for cryptocurrency and vice versa
- They are user-friendly and therefore easy to use
- CEXs accounts have insurance, which means users get their money back if something goes wrong
- They offer additional services such as crypto-debit cards, which can be applied for using online services like shopping
- Users have no access to private keys of their exchange account’s wallets
- A third party controls over all the transactions
- They are vulnerable to hacking
- They are at the risk of governmental shutdown (China, South Korea, and Russia)
- Users must provide CEXs with personal information such as bank account, ID, and residential address
Centralized cryptocurrency exchanges are wildly popular among users. It is estimated that more than 90% of the trade volume of cryptocurrency happens on CEX. This is mainly because of the user-friendliness of the CEX interface and the capability of fiat/crypto exchange. However, they are the opposite of cryptocurrency’s purpose and do not offer the same amount of personal privacy and security.
Decentralized Exchanges (DEX)
The same as CEX, decentralized exchanges are a platform for trading cryptocurrencies, but with a major difference. DEX operates based on peer-to-peer technology and has eliminated the need for an intermediary. Some of the main features of decentralized cryptocurrency exchanges are:
- No third party can control transactions
- Only users have access to their private keys
- Only crypto/crypto trading is accepted
- KYC or AML measures are not in place
- Staking coins is usually available
- Market takers, but not market makers
- Prices are set by supply and demand
The same as CEX, decentralized exchanges have their advantages and disadvantages, and the main aspects are listed below:
- Intermediaries are eliminated, so users control their transactions
- Transaction fees are typically lower because the third party is eliminated
- Only users have access to their wallet private keys
- Users can exchange any cryptocurrency they want
- Lower risk of hacking
- The risk of a governmental shutdown is eliminated
- They are not user-friendly
- The platform is exclusively for exchanging cryptocurrencies (fiat/crypto is not allowed)
- Many scams with scammers listing junk ERC-20 tokens on the exchange.
- They don’t offer additional services to users
In general, there are two major drawbacks to decentralized exchanges. First, the platforms’ difficult interface, which makes them hard to use, and second, the lack of supporting fiat/crypto exchanges. However, the popularity of decentralized cryptocurrency exchanges has been increasing slowly. They are the true version of what cryptocurrencies are supposed to be. They are decentralized, trustless, and anonymous. Moreover, decentralized exchanges are usually the only place users can trade certain altcoins. Using DEXs has increased as more users are investing in altcoins.
Which one is better?
It slightly depends on what users are looking for. It is obvious that decentralized exchanges offer the features that decentralized internet and cryptocurrencies were invented for, like anonymity, privacy, and security. However, as we discussed, DEXs are difficult to use for the majority of ordinary users. So, it currently depends on what users expect from their trading experience. But what about the future?
What is the future of cryptocurrency exchanges, DEX or CEX?
We listed the benefits and drawbacks of both models and emphasized how the purpose of inventing cryptocurrencies was a decentralized world. However, we believe that the future of cryptocurrency exchanges lies in CEX. In addition to a difficult user interface, the lack of support for fiat currency is a serious obstacle for DEX to expand its market. Cryptocurrencies are becoming valuable assets in our modern life; however, cryptocurrency owners need to use their assets in the real world, a basic need that DEX cannot fulfill. The figures support this assumption, too. More than 95% of cryptocurrency exchanges are currently carried out in centralized exchange platforms, and most people use decentralized exchange platforms only for trading altcoins.
Although the function of CEX and DEX are similar, their operation is different. They both have some advantages, and neither is flawless. Considering the current options they offer users, and we believe that centralized exchanges will continue to dominate this market.