Compared to the CEX, the DEX mainly lacks usability and liquidity and has not lived up to the hype. Ultimately, however, it wins out because of its inherent superior design and benefits, says Kurt Ivy.
The decentralized exchange (DEX) has been a hotly debated topic over the past decade. The use cases for the DEX are clear. Most of the world’s largest exchanges (like Coinbase and Binance) operate on a centralized trading model. While this was fine for historical stock markets, it violates the fundamental principles of blockchain.
Centralized Exchange (CEX) requires users to submit their sensitive information to large commercial organizations that send it to government agencies. This is the polar opposite of blockchain technology, which aims to eliminate all third parties. The centralized exchange is also not as flexible as it does not use smart contracts.
Because of this, it is more expensive and slower than the DEX. But the fact remains that although we have seen the likes of Curve and Uniswap for ERC-20 tokens, we have yet to see a fully operational DEX for heavily traded Web3 products. There is also the problem of usability – existing DEXs are not user-friendly at all.
The DEX vs. the CEX
The centralized exchange has all the hallmarks of legacy institutions. The main advantages are that it is very safe and user-friendly. You also benefit from customer support, although the quality varies. The CEX offers far more liquidity and is well suited for larger institutions and those looking to trade with volume.
On the other hand, you share your information with a centralized commercial entity that passes that information on to regulators. That means it’s not really different from an exchange and you’re personally tied to the products. The entire premise of blockchain is that no personally identifiable information is tied to wallets and NFTs, a fact many overlook when discussing the new ecosystem.
Aside from this core point, there are other downsides to the centralized exchange. It’s not nearly as fast or as inexpensive as the DEX. While a CEX like Binance or Kraken might charge between 0.1% and 0.2% on a transaction, a DEX might charge 0.05%. But asset prices between both platforms should theoretically be the same.
The only thing that needs to be stressed about the DEX is that it is not user friendly. Newcomers to the market will have a hard time buying Ethereum, learning all about Metamask and connecting it to an exchange like PancakeSwap or Sushiswap. The entire UI feels unprofessional and thrown together. But it works. Future DEXs will need to evolve to appeal to the masses.
The DEX begins to dominate
Despite some early concerns, DEXs are actually taking over centralized exchanges. ShapeShift switched from a CEX to a DEX in 2021, stating that KYC implementations also cost the platform 95% of its users. In 2020 and 2021, decentralized exchanges started affecting the overall trading volume of the centralized exchanges.
This trend will only continue. DeFi is tightly coupled with smart contract functionality, allowing the DEX to easily integrate features like crypto lending, atomic swaps, yield farming, and more. The CEX cannot easily absorb new paradigms, especially since it is surrounded by so much bureaucracy. Regulation will likely kill the CEX, which needs regulatory certainty for any new innovation in an industry where new innovation is the order of the day.
The DEX also hosts all new Web3 tokens, while the CEX normally only accepts established tokens. So, the DEX can help get new projects listed and is also a great way for ambitious, technology-focused entrepreneurs to invest. The fact that certain centralized exchanges are charging more than $1 million to list tokens is a clear barrier to entry for new projects and an ominous sign of the older model.
Additionally, since the DEX offers its own native token, users can earn rewards from staking or lending, as well as price increases. The centralized exchange does not offer this.
Cutting-edge platforms
New decentralized exchange platforms are coming out all the time. An example is UniqueDEX. It is unique in that it actually allows traders to create their own exchange known as Automated Market Makers (AMMs). Traders can easily start trading cryptocurrencies using yield mining and staking as an incentive mechanism to provide liquidity in the market.
Launched on May 10th, 2022, the platform offers something completely new within the exchange ecosystem. The Smart Contracts have been independently audited. It includes an aggregated and embeddable order book, a decentralized derivatives and futures exchange, and an exchange for all tokenized real assets. The platform is powered by the native UDEX ERC-20 token based on the Ethereum blockchain.
What makes it “innovative” is that it consolidates all the liquidity of the entire crypto market into one easy-to-use platform. Liquidity is a primary concern with the typical DEX. By combining order books from multiple exchanges, UniqueDEX increases liquidity and market depth, enabling the best price from any market at all times. It is 100% custodyless and operates on a DAO-based governance model.
The DEX is changing the world
The fact is that the DEX is already having a profound impact. The benefits are clear and obvious. It just takes a little longer than expected as people resist change. That’s how it was in the early days of cryptocurrencies like Bitcoin, and many people still question the benefits of the revolutionary technology.
The DEX is the future of currency transfers in an economic world that will be based on smart contract functions. While significant tweaks still need to be made, the DEX is poised to take on the centralized exchange and this is evident to anyone with technical trading know-how on either model. Recent trends also reflect this fact.
Even institutional clients will eventually migrate to the DEX if security is ensured, user experience is maximized and liquidity levels are stable. These issues are all being worked on by Web3 DEX developers.
About the author
Kurt Ivy is a content writer for SHOPX and Gamerse, Marketing Advisor for Altar, Content Director at Crypto PR Labs and CEO of Coffee Nova. Ivy is a philosopher, futurist, author and entrepreneur.
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