Centralized Exchanges (CEXs) vs Decentralized Exchanges (DEXs)

Cryptocurrency exchanges – whether centralized, decentralized, or hybrid – have important roles to play in the crypto and wider financial services spaces. Here we talk about the evolution of exchanges, current models, and what the future may hold for the future of finance.

Bitcoin and other cryptocurrencies have slowly yet steadily gained traction since the Bitcoin Genesis Block was mined in 2009. Early crypto exchanges were designed to help connect buyers, sellers, and investors, and they played important roles in connecting projects to funding sources that could help make promising ideas a reality. Exchange listings and financial partnerships were important drivers of the ICO boom of 2017 in which hundreds if not thousands of initial coin offerings were launched. In these ICOs, new tokens were issued to investors in exchange for financing, usually via crypto deposits in the form of Bitcoin or Ethereum.

Today, much of the focus of cryptocurrency exchanges has shifted to providing investors with safe, secure, performant, and reliable trading services. As such, many of today’s most successful exchanges are very similar to established stock trading exchanges such as AMEX, NYSE, or NASDAQ. These exchanges provide a wide range of services such as market orders, limit orders, stop-loss orders, strike options, put options, and margin/leverage trading in which investors can put forward a base investment amount (called the margin) with the exchange providing leverage in the form of higher exposure to the investment vehicle (whether a commodity, stock, token, or digital asset).

Although today’s cryptocurrency exchanges are quite different from the exchanges of even a few years ago, exchanges can typically be categorized as a centralized exchange (CEX), a decentralized exchange (DEX), or a hybrid exchange.

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Centralized Exchanges (CEXs)

Centralized exchanges are currently the most popular type of exchange. They make it easy for investors to open positions in various tokens and assets. CEXs are run by private, for-profit companies, and they usually have custody of the private keys of their users’ wallets. Many CEXs do not disclose sensitive aspects of their internal operations and are not as transparent as decentralized exchanges, but they are usually well-designed and have user-friendly interfaces and native apps, making it easy for laypeople and non-technical investors to gain some exposure to the exciting world of cryptocurrency trading.

Also, thanks to regulation, CEXs are usually authorized to provide financial services to their customers and are required to conduct KYC (know-your-customer) protocols and to put anti-money laundering (AML) systems in place, making them relatively safe and trusted by the general public.

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Decentralized Exchanges (DEXs)

Decentralized exchanges came about to address many of the shortcomings of centralized exchanges. They were developed in response to the need for transparency, anonymity, and freedom from single-party (centralized) control of user funds and assets.

Decentralized exchanges are not built or run on hardware or software owned and developed by a private business, as is usually the case with centralized exchanges. Instead, DEXs are applications built on a blockchain. This allows these exchanges to offer the benefits of blockchain: freedom from centralized control, anonymity, open markets, and freedom from regulation.

Transactions on decentralized exchanges are non-custodial, and traders must own and control their own private keys. Unfortunately, this makes DEXs a little harder to use than CEXs, and the user interfaces of popular DEXs are typically clunky and somewhat difficult to navigate.

Furthermore, although decentralized exchanges offer anonymity to their users, these exchanges are less refined than their centralized counterparts, have less liquidity, and come with fewer trading features. A lack of trading pairs, limited funding options, and cumbersome deposit/withdrawal processes are long-standing obstacles to the adoption of DEXs, even if – theoretically – decentralized exchange is the way the world of finance should be rebuilt.

The good news, however, is that in recent years, many popular decentralized platforms have overhauled their UX and UI, making it easier for users to navigate, use trading features, and make informed investment decisions. Some decentralized exchanges, such as Wisebitcoin, go a step further and provide users with advanced trading charts that make it easy to identify trends and understand price action and market depth. Wisebitcoin also provides its users with advanced trading services, such as options to participate in ETF trading and leveraged trading.

Bleeding-edge cryptocurrency exchanges such as Wisebitcoin have overcome the liquidity issue as well by connecting to a network of exchanges to pool order books and liquidity. Wisebitcoin is connected to a cloud network of over 280 global cryptocurrency exchanges, and this allows its users to buy and sell with richer and deeper trading pools than those offered by many centralized and stand-alone exchanges.

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DeFi and the Future of Exchanges

The last few months have been defining moments for the cryptocurrency space. Large and respected institutional players such as JPMorgan and PayPal have begun rolling out crypto trade, investment, and payment services to their clients. Many governments around the world continue to work with researchers and the business community toward building compliance, regulatory, and related processes that can promote cryptocurrencies while ensuring investor security. And we have seen a slew of new and exciting and promising decentralized financial projects take the world by storm. These projects cover a wide range of services and industries, such as:

  • Alternative savings (Linen App, PoolTogether, Voluto)
  • Analytics (Bloxy, DeepDAO, Kyber Network Tracker)
  • Insurance (Cover Protocol, Nexus Mutual, Opium Insurance)
  • Staking (HyperBlocks, SparkPool, stake.fish)
  • Yield aggregators (Value DeFi, Yearn.finance, bEarn.fi)
  • KYC identity (Blockpass, Bloom, Civic)
  • Marketplaces (OpenSea, Superrare, Rarible)

…and many more.

Two things are clear from the above. First, decentralized projects are revolutionizing the world of finance, and there are many existing and upcoming crypto- and blockchain-powered solutions that will bring about significant changes in the way the world does business. Second, exchanges will once again play a central role in bringing about this change by connecting businesses, investors, institutions, and private individuals to the services that will improve access, lower cost, improve performance, enhance transparency, build liquidity, and more effectively tackle the financial challenges faced by customers of every type all over the world.

The future is unknown, but we can say with a great deal of certainty that decentralized business and finance are here to stay, and we are at the early stages of a new revolution. Cryptocurrency exchanges have a new and important role to play, and the exchanges that innovate and connect their users to new opportunities and provide seamless, hassle-free customer experiences are the ones that will drive the change that will sooner or later become the norm.

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