Cryptocurrency, tokens and coins are traded on two types of exchanges — centralised (CEX) and decentralised (DEX). There has been a lot of speculation on whether centralisation, as a phenomenon, is relevant in the realm of crypto. Many people argue that centralised crypto exchanges run counter to the essence of transparent decentralised ledger. This is essentially true. An added issue is that CEX avoid compliance and resort to denying trading financial instruments to avoid burdensome regulation. It is our firm belief that in the crypto world nothing is clear-cut. There are many halftones between the DEX and CEX concepts, and the question we should ask is ‘to what extent an exchange must be decentralised?’. Imagine that there is such a thing as complete decentralisation; wouldn’t there be a marketplace at all? At the end of the day a market is a meeting point, a concentration of buyers and sellers and the participants with marginal bid and ask rates set the going price.
Decentralisation of exchange: What it means?
The decentralised exchange, or DEX implies trading cryptocurrency, coins, tokens or digital securities without intermediaries but rather directly utilising the blockchain itself. Decentralised exchanges do not have access to customer’s assets. They serve as a layer for trade orders that executes matching and routing functions. The aspect of security is the one that rises to the forefront, when we discuss all this. DEX are more secure as there is nothing to misappropriate, assets are at all times with their owners. The usage of smart contracts brings autonomy to P2P transactions. Other than that, this different approach to market architecture may involve a lot of constraints and limitations unless particularly addressed.
Third Party Risk
In general, decentralised exchanges are essentially exchangers that do not combine the function of being a custodian at the same time, thus eliminating completely the counterparty risk. This is the main reason why the users of centralised platforms are thinking about the transition to decentralised ones and especially the ones with significant assets exposed.
Ease of use
The way the things stand now, a DEX user is deprived of a huge amount of opportunities and services that are normally provided on centralised exchanges. However, this is not intrinsic to DEX but just to the current stage of a long development process. Presently, the features that are common on CEX are not implemented on DEX due to technical challenges that are yet to be resolved. EDSX is working exactly on theses topics with a lot of promising intermediate milestones achieved.
Nowadays, the user experience of decentralised exchanges can be described as poor, without any exaggeration. The customer’s journey reminds us of the early days of the Internet. The steps one has to take in order to execute even a simple trade can be really confusing. In order to exchange one asset to another, a user has to perform several transactions. While the digital users want their apps and platforms to be intuitive and easy to use, DEXs still cannot correspond to these realities. Deeply sensing this, EDSX has taken the strategic decision to focus exactly on these pains in addition to resolving central issues such as depth of market, liquidity and width of bid-ask spreads.
Let’s go back in time and recall those ancient pioneering websites — slow and awkward. You get the same feel while trying to interact with DEXs. Their current UX and UI leave many unresolved issues.
Crypto / Fiat Transition
Centralised platforms build the bridge between fiat and crypto, thus, they accept debit and credit, bank transfers, so the two-way exchange is executed seamlessly. DEX will have to be able to offer the same. This means that a player on the DEX will have to provide this bridge as the very nature of DEX architecture makes it impossible to render automatically.
In terms of fiat/crypto exchange, decentralised exchanges do not do that at all. They simply currently do not take other payments other than cryptocurrency. EDSX resolved this issue by bring a third party independent of the exchange willing to exchange fiat for crypto and vice-versa. However this is may be viewed as a centralised feature within a decentralized exchange.
Regarding the human factor, which adds uncertainty to technological advancements, choosing a regulated crypto exchange can help avoid scams and give some peace of mind. However, regulatory rhetoric is out of place for the time being in the context of both CEX and DEX. CEX claim that they do not exchange assets or financial instruments at all. DEX formally do not have a corporate body to regulate and rather a technology that has to be approved by the regulator. This is due to the distributed nature of DEXs, regulators and governments are not empowered to interfere and control. All can be insured in transparent and automatic way via encoding on the DLT used. With DEX there is no physical location. Moreover, there is no physical manifestation of an exchange.
Liquidity and volume
Another problem that may arise from this at DEX is low trade volumes and insufficient liquidity, which explains the dominance of the CEX. The only way to resolve this is to have proper, deep and liquid market-making participants on such a DEX platform. This is exactly the way EDSX addresses this issue.
Centralised crypto exchanges are currently prioritised by the traders of different levels. The reasons are mainly related to convenience, sufficient functionality, and a huge number of additional services that traders are not ready to compromise.
Unlike decentralised exchanges, centralised one’s approach security through regulation and claimed transparency which may or not be the case. When the exchange is regulated by a jurisdiction, its moral and ethical principles are stipulated by and depend on the enforceability of the law. Trust, as the most valuable asset of crypto business, is grounded on the clients’ confidence that their financial well-being is not threatened. In this digitalised era, these are the basic guarantees we can and need to provide traders with. With DEX, trust is to be guaranteed by the technology itself. So trust is in-built in their design and functioning of the applied technological solution. The magnitude of scams and frauds is immense with CEX, and even the largest market players fall victims and face reputational damage. So, our solution is to make such vulnerabilities impossible.
Status-quo and the Future
Approximately 99% of crypto trade at present is fulfilled via centralised crypto exchanges. This is expected to change. CEX is a full-fledged organisation that oversees a set of daily procedures such as maintenance, security and growth. The CEXs play the part of mediator — a platform connecting buyers and sellers. More prominent industry players provide an extensive list of additional services, trading options such as lending, margin trading, high-volume trading discounts, institutional trading tools etc. If DEX are to challenge this status, they have to match all these value-added services whilst removing the discretion and reliance on human-run controls and compliance procedures and the ensuing counterparty risks.
Customization vs Ease of Use
From an architectural standpoint, centralised crypto exchanges are often guilty of sameness and monotony. In this case, you have to turn to the platforms which were built by teams with a vast financial background. The point is, the industry has been nurtured by fanatics and enthusiasts whose emotional element overshadows practical skills and understanding — this is where the architectural issue comes from. We have paid a lot of attention and poured our knowledge into building the trader’s workspace to provide personalised, customised service. A major challenge in this area is to balance massive functionality with ease of use. This is the exam where many fail. At EDSX we focus on the essentials and will only add functionality and services where the value added outweigh the tax of complexity.
When speaking about centralised and DEX exchanges, we mean the following layers: UI, administration, trading mechanism and, of course, database. As long as there is a huge amount of customer information being saved, this is what presents interests for hackers. DEX is entirely ditching the necessity to deal with customer information in relation to disposability of assets. Minimum information is held for compliance with KYC/AML regulatory requirements.
If centralisation contradicts the nature of cryptocurrency, then complete decentralisation contradicts the nature of markets and the need for liquidity. In decentralised environments control, supervision, both leaders and their followers will have to agree on essential order built into the code and consensual block-chain architecture. The nearest future will bring us a new type of trading platform which will be a hybrid option between decentralised and centralised cryptocurrency exchanges, removing the vulnerabilities of CEX, pushing the compliance towards automatism of DLT and keeping central just the gravity of liquidity.