The DEX mainly lacks usability and liquidity compared to the CEX and has not lived up to the hype. However, it is ultimately taking over due to its inherent superior design and benefits, says Kurt Ivy.
The decentralized exchange (DEX) has been a hotly discussed topic for the past decade. The use cases for the DEX are clear. Most of the world’s largest exchanges (such as Coinbase and Binance) operate under a centralized trading model. While this was fine for the historical equity markets, it runs against the core principles of blockchain.
With the centralized exchange (CEX), users have to submit their sensitive information to large commercial organizations who send it to state bodies. This is the polar opposite of blockchain technology, which aims to render redundant all third parties. The centralized exchange is also not as flexible as it does not make use of smart contracts.
Due to this, it is more expensive and slower than the DEX. But the fact remains that we have not yet seen a fully functional DEX for highly traded Web3 products, though we have seen ones like Curve and Uniswap for ERC-20 tokens. There is also the issue of usability – existing DEXs are not at all user-friendly.
The DEX vs The CEX
The centralized exchange has all the hallmarks of legacy institutions. The primary benefits are that it is very safe and user-friendly. You’ll also benefit from customer support, though the quality is variable. The CEX offers far more liquidity and is well suited for larger institutions and those looking to trade at volume.
On the other hand, you will be giving your information to a centralized commercial entity, who hands this information to regulators. In other words, it’s not really different from using a stock exchange and you are personally tied to the products. The entire premise of blockchain is that no personally identifying information is tied to wallets and NFTs, a fact many overlook when discussing the new ecosystem.
Aside from this key point, there are other disadvantages with the centralized exchange. It is nowhere near as fast or as cost-effective as the DEX. While a CEX like Binance or Kraken might charge between 0.1% – 0.2% on a transaction, a DEX might charge 0.05%. But the prices for assets between both platforms should theoretically be the same.
The one thing that does need to be stressed about the DEX is that it is not user-friendly. Market newcomers are going to have a tough time purchasing Ethereum, learning all about Metamask, and connecting it to an exchange like PancakeSwap or Sushiswap. The entire interface feels unprofessional and thrown together. But it works. Future DEXs will need to evolve for mass appeal.
The DEX Is Starting To Dominate
Despite some early concerns, DEXs are, in fact, taking over from centralized exchanges. ShapeShift transitioned from a CEX to a DEX in 2021, stating that KYC implementations also cost the platform 95% of its users. Throughout 2020 and 2021, decentralized exchanges started to eat into the overall trading volume of centralized exchanges.
This trend is only going to continue. DeFi is intimately tied to smart contract functionality, so the DEX can easily integrate features like crypto lending, atomic swaps, yield farming, and much more. The CEX cannot accommodate new paradigms as easily, especially as it is surrounded with so much red tape. Regulation is likely to kill the CEX, which needs regulatory certainty on every new innovation in an industry where new innovations are commonplace.
The DEX is also home to all new Web3 tokens, while the CEX typically only accepts established tokens. So the DEX can help new projects get listed and is also a great way for ambitious tech-focused entrepreneurs to invest. The fact that certain centralized exchanges are charging upwards of $1 million to list tokens is a clear barrier to entry for new projects and an ominous sign for the older model.
Moreover, because the DEX offers its own native token, users can gain rewards from staking or lending, as well as price appreciation. The centralized exchange does not provide this.
New decentralized exchange platforms are coming out all the time. An example is UniqueDEX. It’s unique in the sense 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.
The platform launched on May 10th, 2022, and offers something entirely new within the exchange ecosystem. The smart contracts have been independently audited. It includes an order book that is aggregated and integratable, a decentralized derivatives and futures exchange, and an exchange for all tokenized real-world assets. The platform is powered by the native UDEX ERC-20 token, built on the Ethereum blockchain.
What makes it “cutting-edge” is that it aggregates the entire liquidity of the overall crypto market into one user-friendly platform. Liquidity is a prime concern with the typical DEX. By combining order books from multiple exchanges, UniqueDEX increases liquidity and market depth, allowing the best price from any market, anytime. It’s 100% non-custodial and operates on a DAO-based governance model.
The DEX Is Changing The World
The fact is that the DEX is having a profound impact already. The benefits are clear and obvious. It’s just taking a little longer than expected due to the fact that people are resistant to change. It was the same in the early days of cryptocurrencies like Bitcoin, and many people are still questioning the benefits of the revolutionary technology.
The DEX is the future of currency transfer, in an economic world that is going to be founded on smart contract functionality. Though there is still considerable optimization to be done, the DEX is all set to take over from the centralized exchange, and this is obvious to anybody with technical trading expertise on both models. Recent trends also reflect this fact.
Even institutional clients will eventually migrate to the DEX, when safety is assured, user experience is maximized, and liquidity levels are stable. These issues are all being worked upon by Web3 DEX developers.