Decentralized Exchanges (DEX) Have Many Benefits, But Timing Is Uncertain
Binance, Coinbase pro, Kraken and Okex are among the most popular platforms for trading crypto — and all run a ‘centralized’, clearinghouse style system where a single organization manages the flow of operations on the exchange. This means that user data is stored on single servers, as opposed to being distributed across multiple ledgers on a public blockchain.
In contrast, decentralized exchanges (DEXs) like Bancor, IDEX, and Etherdelta, offer peer-to-peer or order book-based, non-custodial, trustless exchange solutions. They carry trades on the blockchain, so parties to a trade exchange assets directly, eliminating the need for a central party to hold client funds.
With user data spread across multiple data points, DEXs have obvious security advantages over centralized exchanges, and also offer a number of other potentially significant advantages. In spite of these benefits, DEXs are only conducting a fraction of the trades of their centralized counterparts.
To put things in perspective, Binance handles more volume in 24 hours, for example, than Bancor and Waves, handle in 30 days.
Centralized Exchange Have Better User Experience
For the ordinary retail investor/crypto trader, exchange hacks are rare enough that they are not really on anybody’s radar. Furthermore, because of the Mt Gox breach, any exchanges that have been hacked have typically replaced any funds lost by users, thereby negating much of the fear-factor that might have driven somebody to a DEX. Besides, centralized exchanges like Binance and Coinbase continue to make strides in user interface, customer support, and liquidity solutions.
Possibly the biggest issue facing DEXs may be the price slippage and liquidity. Slippage occurs when delays in order settlement can affect the price users pay for their trades (up or down). Addressing this is a challenge for DEXs for a number of reasons, but it’s primarily a numbers game — there simply aren’t enough traders using them.
The 0x Protocol
There is a reason to be hopeful about the future of decentralized exchanges, however, as progress like the 0x protocol could enable DEXs to offer solutions comparable to centralized exchanges.
With 0x, market making, and buyer & seller interactions occur off-chain before transaction settlement occurs on-chain. Exchanges operating using 0x, can thus offer more complex revenue models through schemes like fee splitting with other exchanges using 0x, reserve manager models where exchanges contribute to each other’s liquidity, and similar solutions that improve user experience off chain, while retaining the integrity of a blockchain settlement layer. In doing so, exchanges operating with the 0x protocol should be able to address issues such as poor liquidity and slippage.
Decentralized exchanges may win over their centralized counterparts when it comes to security, and alignment with the fundamental crypto philosophy of ‘decentralization'. However, when it comes to other relevant metrics such as liquidity, user experience, trading pair options, and accessibility, centralized exchanges currently offer far superior options over DEXs.
Anyway, DEXs are a crypto infrastructure solution with significant potential, and their practice could accelerate under the right market circumstances.