Decentralized cryptocurrency exchanges (DEXs) are growing faster than centralized exchanges (CEXs). This is according to a report from Citigroup (C). The gap can widen as users move away from centralized platforms to avoid cumbersome customer verification processes.
Decentralized Crypto Exchanges and Centralized Peers
DEXs are blockchain-based applications—these apps coordinate large-scale digital asset transactions. The transactions occur between users using automated algorithms instead of the traditional approach of acting as a financial intermediary between buyers and sellers.
DEXs provide token holders with distributed income. The incomes include dividends, the ability to self-custody their funds, and reports. These exchanges offer lower fees when trading with premiums than platforms such as Coinbase Pro and Citi.
The main difference between DEX and CEX is the storage of funds. Storing assets on CEX is risky, according to the bank. Banks cite the failure of credit platform Celsius Networks and broker Voyager Digital as examples.
A potential driver of DEX volume in the future is regulation. Crypto regulation is evolving with growing reporting requirements. Users may move from “the KYC-heavy CEX” to the DEX because of the “know your customer” requirement. The regulatory environment is likely to become more “cumbersome.” More users will switch from centralized exchanges to decentralized exchanges.
According to Citi, DEXs account for 18.2% of spot trading volume. The volume stabilizes at over $50 billion per month, with a total volume of $3.6 billion last year. Uniswap remains dominant, with around 70% of the total DEX volume. DEX might pay out up to $250 million to token holders if recent governance proposals are passed. This could be an important pivot for fundamental DEXs within the DeFi space.
Difference Between Centralized Exchange (CEX) And Decentralized Exchange (DEX)
An exchange is responsible for buying or selling cryptocurrencies. These are the digital markets where most crypto trading takes place. Most use business models similar to traditional institutions such as the New York Stock Exchange. More people are going decentralized and fundamentally rethinking how exchanges work. This section describes the advantages and disadvantages of each type.
Decentralized Exchanges (DEX) have emerged over the past five years. DEX challenges the established Centralized Exchanges (CEX).
DEXs aims to offer lower trading fees. This allows users to hold their assets directly and avoid regulatory burdens. Liquidity providers must receive compensation for a particular risk known as ‘temporary loss.’ CEX has its advantages. They generally offer more liquidity and more robust regulatory protection. This can be especially important for institutional investors.
DEXs Build on CEXs Shortcomings
DEXs complete transactions faster and cheaper than their centralized counterparts. This is by excluding intermediaries who demand lower transaction fees on CEX. The world’s largest DEX proclaims “zero rent extraction.” The intent is to protect users from the additional costs associated with generating profits for intermediaries operating CEX. Launched in 2017, the first DEX, Bancor advocates a decentralized approach.
DEXs uses an “automated market maker” protocol to determine the price of an asset. This occurs without a central authority coordinating the trades. A common approach is the “constant product” mechanism. This determines the price offered as a function of the ratio of his DEX’s total reserves for each participating asset. This has the advantage that funds tend to remain in relative balance. Shortage of support can be costly.