Decentralization is the norm right now, we have got decentralized currencies - (Bitcoin, Ethereum, Ripple [ XRP ] (https://coingape.com/ripple-xrp-price-prediction/), IOTA (https://coingape.com/iota-miota-price-prediction/) etc.), decentralized applications, and now it’s time for decentralized cryptocurrency exchanges also known as DEX.
With Binance stepping into the DEX arena, decentralized exchanges are gaining popularity. But Binance DEX is not the first decentralized exchange, but probably the most popular one right now because of being owned by the biggest crypto exchange Binance. Some other DEXes gaining popularity are EtherFlyer, WavesPlatform, KyberNetwork, Idex etc. Today, we will dive into why decentralized exchanges are the future.
What Are Decentralized Exchanges?
Here we are assuming that you are aware of how blockchain and exchanges work in general.
By its name, a decentralized exchange is a cryptocurrency exchange that is not controlled by a central authority. The fundamental difference between these exchanges is that a centralized exchange stores your private key when you sign up. On the other hand, in a decentralized exchange, the private key is given to the user or stored in the browser. Basically, the user has complete control over his transactions.
What Is The Need For Decentralized Exchanges?
When we use a centralized crypto exchange, we give our private key to the exchange. But what if the exchange shuts down or they misplace the private keys? Now, one may say that there are other centralized exchanges that use multiple keys, so that wallet is always safe(though, security to hardware wallets (https://coingape.com/best-cryptocurrency-hardware-wallets/) is equally important). But still, are not we giving too much power to a single entity?
Additionally, a centralized exchange has a single point of failure, which makes them more susceptible to cyber attacks. In the first quarter of 2019, $356 million worth cryptocurrencies were stolen. In 2018, $1.7 billion worth of cryptocurrencies were stolen. Cyber attacks are getting more frequent every year, boosting the confidence of hackers.
In such a time, hardware wallets might be the safest option to store your cryptocurrencies. But decentralized exchanges also offer a working solution, because of having distributed nodes, it is less prone to any form of cyber attacks.
Comparing Centralized Exchanges To Decentralized Exchanges
We have only talked about the more basic differences between the two types of exchanges, but now we will talk about the practical differences between the two.
| Parameter | Centralized Exchanges | Decentralized Exchanges |
|---|---|---|
| Controlling entity | A singular central authority or group. | Nobody owns it, everybody controls it. |
| Ease of use | Easy to understand, just like using a wallet. | Quite challenging in comparison to CEs. |
| Volume | As of now, 99% of transactions still take place on centralized exchanges. So, CEs have better trade volume. | Comparatively lower because of its shortcomings. |
| Liquidity | High Liquidity | Not enough liquidity to compete with any major CE. |
| Fiat-Crypto Exchange | Yes. Some Centralized Exchanges have the option to exchange fiat for crypto and vice versa. | No. Only cryptocurrencies can be exchanged on DEX. |
| Direct fiat payments | Yes. Most of the CEs support this feature. | No. DEX only accepts crypto payments. |
| Safety from cyber attacks | Quite prone because of having a single point of failure. Even the top CEs like Binance has been hacked for over $80 million. | Not hack-proof but offers less risk because of the distributed nodes. |
| Infrastructure downtime risk | This totally depends on the operator or the owner of the exchange based upon the features they offer. | As the network is distributed, there is no risk of downtime. |
| Regulatory Interference | On the basis of the location of CE, regulations apply and governments can control CEs. | Because of distributed nature, it is impossible to regulate. |
| Requires KYC | Yes | No |
| Anonymity/Privacy | Prone to identity theft and you have to trust the exchange. | Pure anonymity and untraceable transactions. |
| Functionality | Centralized exchanges have a plethora of functions like margin trading, discounts for high volume trading, Forex style currency pair trading etc. | Centralized exchanges have a plethora of functions like margin trading, discounts for high volume trading, Forex style currency pair trading etc. |
| Transparency | Most of the CCEs make their ownership details, location of offices and servers, public. But not all No formal location. | No |
| Insurance | CEs offer insurance to its users, which means, in case of failure, you will get your insured amount of sum back. | No |
Conclusion
As we can see from the above table, DCEs (or DEX) are still not mature. While they offer advantages like complete control, privacy, no regulations, safety and others, it still misses out on being the pragmatic replacement to centralized exchanges.