Cryptocurrency, tokens and coins are traded on centralized (CEX) and decentralized exchanges (DEX). While decentralization aligns with blockchain ideals, centralied crypto exchanges have faced issues with compliance as regulators seek to curb illicit activity. Avoiding know-your-customer rules and restricting certain trades are short-term solutions to regulatory pressures that do not address deeper issues with exchanges acting with insufficient transparency. In reality, decentralization exists on a spectrum rather than as an absolute state. The degree of decentralization needed remains unclear, as complete decentralization would eliminate market formation. Ultimately, exchanges serve as marketplaces that concentrate buyers and sellers setting price through supply and demand.
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
Decentralized exchanges solely exchange, avoiding custodial duties that cause counterparty risk. This makes centralized users consider transitioning to decentralized platforms, especially for large exposed balances.
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.
User Experience
Nowadays, users describe the experience of decentralised exchanges as poor without 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
Centralized platforms build bridges between fiat and crypto by accepting debit, credit, and bank transfers, executing two-way exchanges 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.
Speed
Transaction speed is another issue worth mentioning. Miners must directly record the exchange process on the blockchain, so users can only conduct transactions after miners process them. This aspect may not be a significant factor for small-sized operations. But, for trading large blocks, or the so-called block-transactions in a matter of moments, via algorithmic robots, transaction processing time is a substantial indicator. Having explored different options to resolve this very important issue EDSX decided to bring a market-making party with transaction settling functionality directly coded into the smart contract. In the future a blockchain environment better than Ethereum in terms of use may be adopted by DEXs. A winner blockchain is yet to be selected when emerges.
Regulation
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. DEXs lack a regulating corporate body and instead rely on technology approval by regulators. This decentralized nature means regulators and governments cannot interfere or control due to their distributed structure. Encoding insurances transparently and automatically onto the supporting DLT accomplishes this. 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.
Security
Unlike decentralised exchanges, centralised one’s approach security through regulation and claimed transparency which may or not be the case. Regulated exchanges rely on laws to dictate principles, as legal compliance defines ethics. Clients trust exchanges ensuring financial safety, making trust the crypto industry’s most important asset. 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. Leading exchanges offer lending, margin trades, discounts for large volumes, and tools for institutions. DEXs aim to match such value while removing reliance on people for compliance and the accompanying counterparty dangers.
Customization vs Ease of Use
From an architectural standpoint, centralised crypto exchanges are often guilty of sameness and monotony. In this case, turn to platforms built by teams with vast financial experience. The industry grew through fanatics and enthusiasts whose passion obscured practical skills and comprehension, causing architectural problems. 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.
Elements involved
When speaking about centralised and DEX exchanges, we mean the following layers: UI, administration, trading mechanism and, of course, database. Hackers take interest whenever exchanges save huge amounts of customer information. DEX is entirely ditching the necessity to deal with customer information in relation to disposability of assets.Exchanges hold minimum information to comply with KYC/AML regulatory requirements.
The Conclusion
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.
Based in Zug, the platform is fully compliant with all Swiss laws related to financial intermediaries, banking, anti-money laundering, and organized trading facilities. Among its core values, there are innovative solutions through blockchain technology, which ensures security and liquidity.
EDSX is the first platform in Europe with primary and secondary markets for both institutional and retails. EDSX is a pioneering platform that employs the world’s leading technology to globally list security tokens in both primary and secondary markets, listing digital securities of real financial instruments to the public with a decentralized peer-to-peer exchange. Our goal is to fully engage every aspect of the financial revolution.
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