Decentralised Exchanges: A New Frontier Overcoming Centralised Limitations

As the world of cryptocurrency continues to evolve, a significant shift is taking place from centralised exchanges (CEXs) to decentralised exchanges (DEXs). The decentralised model of trading cryptocurrencies offers a host of advantages that are prompting more and more traders to shift away from traditional, centralised platforms. Here's a look at some of the key benefits that DEXs offer over their centralised counterparts.

Limitations of Centralised Exchanges

1. Full User Control and Privacy

Perhaps the most significant advantage of DEXs is that they give users complete control over their funds. While CEXs require users to deposit their assets into an exchange-controlled wallet, DEXs allow users to maintain control of their private keys, significantly reducing the risk of large-scale hacks. This feature alone enhances user privacy and security immensely.

2. Greater Transparency

DEXs operate on blockchain technology, which ensures all transactions are public and every single action can be traced by anyone. This transparency reduces the chances of price manipulation and shady practices that can occur on CEXs. Users can verify transactions on the blockchain rather than having to trust a central authority.

3. Open and Permissionless

DEXs are typically open and permissionless. This means that anyone, regardless of their location, citizenship or governmental censorship, can participate in the exchange without the need for lengthy registration and KYC (Know Your Customer) processes. This openness fosters inclusivity and democratises access to financial services.

4. Resilience to Regulations

While CEXs can be shut down by regulations due to their centralised nature, DEXs, being distributed, are resilient to such actions. This decentralisation means they can operate across jurisdictions, making it difficult for any single entity to control or close them.

5. Reduced Counter-party Risk

In a centralised exchange, the exchange itself acts as the counter-party to every transaction, carrying the risk of default. DEXs, on the other hand, eliminate this counter-party risk by enabling direct peer-to-peer transactions using smart contracts. This not only enhances security but also promotes a trustless trading environment.

This is particularly important given the recent collapse of FTX which uncovered the true danger of centralised exchanges and how easily funds can be miss-managed. These recent events are bringing a lot of attention from regulators that will try and regulate the entire industry more and more. This goes against the fundamental ideology of blockchain technology and crypto industry as a whole.

6. Innovation and Interoperability

DEXs are at the forefront of the DeFi (Decentralised Finance) movement, providing innovative features like liquidity farming, yield aggregators, and more. They are also increasingly becoming interoperable, meaning they can communicate and share liquidity with other blockchains, something that is currently beyond the reach of CEXs.

Limitations of Decentralised Exchanges

Although there are a lot of advantages to using decentralised exchanges there are also a number of problems that are associated with them. The biggest ones are as follows:

1. Lack of Liquidity and Volume

The majority of crypto market's liquidity lies within centralised exchanges. The volume of assets moving through decentralised exchanges account for 8% — 14% of total volume. In my opinion, this is an alarming statistic as a large portion of liquidity of the entire market is concentrated in centralised entities which lack transparency and may potentially result in a large scale loss of funds. Nevertheless, the problem of smaller liquidity and volume on decentralised exchanges is apparent. To make matters worse, decentralised liquidity is usually fragmented across different DEXes and in some cases across different chains. This results in increased slippage and volatility comparing to centralised exchanges.

2. Fiat support

Another challenge that is apparent with decentralised exchanges is the on-ramping and off-ramping. Exchanging fiat for crypto and vice versa is not yet possible in a fully decentralised manner and this is a hurdle that is isolating a large number of users especially newcomers from using decentralised exchanges. The main gateway into the world of crypto is still centralised exchanges.

3. All chains in one place

Decentralised exchanges usually support one blockchain this greatly limits the pool of projects that are accessible to a user of that DEX. There are dozens of different blockchains with hundreds of projects on each of them and you need a separate wallet and a separate DEX for each one of those blockchains. This is highly confusing, inconvenient and scares a way a large portion of users who prefer the ease of use of centralised exchanges.

Conclusion: A Paradigm Shift towards Decentralisation

While CEXs have and still do play a vital role in the cryptocurrency industry's growth, the shift towards DEXs is undeniable. Although there are still large hurdles for decentralised systems to overcome, fundamental advantages of decentralised systems provide enhanced security, privacy, and accessibility. DEXs are not just addressing the drawbacks of centralised systems, but they're also aligning more closely with the fundamental ethos of blockchain technology — decentralisation. As the DeFi sector continues to mature, the adoption and advancement of DEXs will only accelerate, marking a significant milestone in the evolution of digital asset trading.

Keep an eye out on our next post where we will be discussing solutions to some of the problems with decentralised exchanges and how Concero is working towards solving them.

🤝 Follow us for upcoming updates on Concero Socials :

Concero.io | Concero Blog | Twitter | Discord | Telegram