Unlike centralized exchanges, DEXs do not function as a bank or traditional fiat currency exchange, but instead they allow direct, peer – to – peer trading ( P2P ) in cryptocurrency, where users control their funds.
Centralized vs Decentralized Exchanges
Centralized markets dominate the global volume of cryptocurrency trade with an overwhelming margin, and the trading volume is much more constant ( although it is still incredibly volatile compared to traditional stock systems ). Centralized exchanges can do so without any problems because trading on centralized markets does not involve any cryptocurrency movement. Digital assets in centralized markets are only transferred when they WITHDRAW from the stock market, not in all transactions. In general, cryptocurrency regulation is still a bit of a legal grey area – especially when it comes to decentralized exchanges. The massive armies of automated price robots for a given market bring rapid changes, so playing multiple markets at the same time offers some additional benefits for experienced algorithmic traders.
Centralized exchanges are fast because they are centralized and do not exchange assets in the chain. The advantages of legitimate central markets include offering substantial liquidity ( approximately 99 percent of cryptocurrency is done on central markets ), offering fiat on-ramp, offering greater trade functionality and the ability to use sophisticated trading strategies, institutional support, and compliance with the laws of the jurisdictions in which they reside. The decentralized exchanges ( DEXs ) are applications built on the dapp platforms ( such as Ethereum ) that use smart contracts to facilitate trade.
To make things more complicated, there are actually several models that are currently used by decentralized exchanges. Centralized exchanges continue to dominate the daily trading volume, primarily due to significant technological and user experience barriers that continue to separate centralized and decentralized markets.
In general, centralized exchanges are a more straightforward point of entry for new people who are new to digital currencies. Centralized exchanges can also provide additional services for their customers, which are not yet available on decentralized markets such as margin trading, loss prevention, and lending. One of the criticisms of the centralized exchanges is that they oppose the decentralized world of the blockchain, which essentially gives up power to a third party.
More specifically, decentralization causes censors, which in the case of a decentralized exchange, means that no central authority could impose regulations, or even ban currencies and the exchange itself. Without a decentralized exchange, the people’s ability to invest in cryptocurrency is subject to governments, so that cryptocurrency is hardly more democratic than traditional capital markets. Governments can control centralized exchanges, and users are subject to authorities who can track and tax users at any time, or ban currencies.
Decentralized exchanges can vary considerably in terms of technology, lack of trust, security, legal consequences, economic consequences, and many others. Keep in mind that for many decentralized applications, one or more components can be off – chain centralized or have economic incentives to support a trend towards centralization. Most of the decentralized exchange protocols usually work with chips with the same technical implementation and are on the same distributed ledger platform.
Though the motive of cryptocurrencies was decentralization before decentralized exchanges can achieve the popularity of centralized exchanges, they will have to become more user – friendly, interoperable between different block architectures and increase their liquidity.