Cryptocurrency exchanges come in decentralized exchanges (DEXes) and centralized exchanges (CEXes). Both have their pros and cons.
While CEXes are controlled by a central authority, DEXes use smart contracts to run them instead. As a result, a team can create a DEX without having complete control over users' private data and funds. Additionally, DEXes usually utilize automated market makers (AMMs) instead of traditional order books to enable 24/7 asset exchange through liquidity pools. You can learn more about AMMs in this post.
Although CEXes have been dominant in the cryptocurrency industry, DEXes are becoming increasingly popular by offering peer-to-peer trading and access to many decentralized finance (DeFi) services.
Let's take a closer look at some of the most significant advantages and disadvantages of DEXes.
Decentralized exchanges (DEXes) offer several benefits that crypto users value highly. Decentralization is arguably the most significant one. As mentioned earlier, DEX developers do not have complete control over their operation or access to users' funds. DEXes operate on a distributed network of nodes that work together to facilitate transactions. Such an approach eliminates the need for a central authority to regulate the exchange altogether and ensures that no single point of failure can disrupt the system. As a result, DEX users can enjoy greater security and transparency in their transactions.
Decentralization leads to the second advantage, which is enhanced security. Since DEXes do not have centralized wallets that hackers can target, the possibility of successful hacks is lower. Many DEXes work on the P2P (person-to-person) model, and funds get transferred from one user to another without being stored in one place. Additionally, DEXes use smart contracts to execute and record trades on the blockchain, making transactions trustless and enhancing their security further.
The next advantage is privacy. DEX developers prefer countries that do not regulate crypto projects to avoid compliance with regulations and rules. As a result, decentralized exchanges do not compromise users' privacy, requiring only a username, password, and crypto wallet to begin trading. This approach to personal information appeals to users who prefer anonymity and want to deposit, trade, and withdraw their funds quickly without going through KYC or AML procedures.
The fourth advantage is the diversity of coins and tokens DEXes offer. CEXes carefully select which assets they want to list and usually choose those with high trading activity. In contrast, DEXes are more open to smaller and lesser-known projects, enabling users to trade their tokens P2P and thus providing more opportunities for diversifying one's crypto portfolio.
Lastly, trading on DEXes might sometimes be cheaper than CEXes since they operate without intermediaries and aim to attract users with small fees (or even their absence) due to high competition in the DeFi industry. While gas costs and fees may vary depending on the network you use, the price of exchanging assets on DEXes will likely be lower than the fees charged by centralized exchanges.
Decentralized exchanges have some disadvantages that impede their widespread adoption. Firstly, their interfaces are often complex, which can be challenging for people unfamiliar with blockchain technology. Moreover, the exchange process may have additional steps, including buying crypto for fiat elsewhere and setting up external wallets. The fact that users have to go through extra steps and interact with other applications or platforms before using DEXes can deter new users who cannot invest a lot of time and effort to learn many new things at once.
To make matters worse, DEXes often lack sufficient customer support, which is essential for inexperienced users who encounter such complicated technologies for the first time. As a result, resolving technical issues or other problems may be difficult for DEX traders, particularly beginners.
Secondly, DEX users may suffer from inadequate liquidity. Due to their novelty and the variety of trading pairs they support, DEXes sometimes struggle to attract sufficient liquidity for some pairs and maintain a smooth exchange process. Insufficient liquidity leads to high price slippages (the difference between the expected price of a trade and the final exchange price). To reduce slippage risks, DEXes involve professional market makers who help maintain high trading activity by buying and selling assets with users. In addition, some DEXes allow users to set their slippage tolerance to limit the possible difference between the expected and actual price.
The third disadvantage is the inability to buy digital assets using fiat currencies or withdraw into their bank accounts. Although stablecoin technology attempts to replicate fiat's role in the DeFi ecosystem, the lack of fiat can be a challenge for novice users, creating a significant barrier to entering the crypto world. While DEXes operate independently of the traditional finance system, users must still familiarize themselves with CEXes (or other platforms or services) that offer fiat-to-crypto trading.
Finally, DEX users may encounter speed issues. Decentralized exchanges rely on smart contracts and operate on-chain, which can make achieving consensus and executing trades slower than on CEXes that usually trade off-chain. The speed problem also applies to depositing and withdrawing funds, sometimes making DEXes inefficient. Besides, wait periods can be longer on DEXes when trading rare assets, which lack enough liquidity.
If you want to learn more about DEX problems and possible solutions, you can read this article.
Decentralized exchanges, or DEXes, are increasingly gaining popularity in the crypto market as an alternative to CEXes. While CEXes cater to traders and investors who may not be technologically savvy, DEXes are designed to offer a more efficient and flexible trading experience. Nevertheless, DEX development teams are working hard to enhance user experience, liquidity, speed, and connection to CeFi liquidity, making DEXes more accessible to the broader masses. However, if you are new to crypto, centralized exchanges may be a better choice as you learn, and once you feel confident and comfortable with your skills, you can switch to decentralized ones.
Kinetex aggregates liquidity from dozens of decentralized exchanges and liquidity aggregators. By using the Aggregation mode of the Kinetex dApp and taking advantage of Kinetex algorithms, users can swap over 5000 coins and tokens with maximum benefit. Moreover, the team is working on the second innovative mode, Flash Trade. This mode will allow resolvers to connect liquidity between DeFi and CeFi, enabling users to trade more flexibly and efficiently.