Are Decentralized Exchanges Gradually Replacing Centralized Exchanges?
The exchange business in the DeFi ecosystem over the years has been dominated by centralized exchanges. However, increasing challenges like security risks, being a honeypot for hackers and centralized control faced in these CEXs have given rise to decentralized exchanges.
Calls for decentralized exchanges grew amid the growing challenges faced in CEXs. Making DeFi services easily accessible to all, and taking the controlling power from central authorities have become highly crucial for true growth to be witnessed in the DeFi ecosystem.
Today, decentralized finance has experienced an unprecedented growth of DEXs. In the first two months of 2020, DEXs delivered a trading volume four times the previous year to the tune of US$600 million. As of September last year, one of the most popular and fast rising DEXs — Uniswap, recorded a trading volume of US$30.4 billion while SushiSwap, another popular DEX, was responsible for 8% of the total DEX trading volume. The growth in trading volume for DEXs last year, 2020 was by far greater than those of CEXs.
Why are DEXs growing so fast?
Following the several challenges faced by centralized exchanges and the need to completely democratize decentralized finance, DEXs have found strong grounds for growth due to the various benefits accrued to them. According to a recent report, DEXs have processed more than US$120 billion in 2021 already. A figure more than all previous years combined. A major pointer to the fact that decentralized exchanges are here to stay.
One major challenge with the many centralized exchanges available today is security. The platforms have been victims of various hacks and scams over the past decade. They became a huge honeypot for hackers. In 2018, over US$500 million worth of digital assets was stolen from Coincheck, a major Japanese crypto exchange. Another US$195 million was lost to hackers by BitGrail, an Italian crypto exchange, just to mention a few. This major problem is why DEXs appear to be a far better alternative to centralized exchanges.
DEXs operate using a peer-to-peer framework where no single entity controls and manages the transactions making them more secure. All transactions and assets are recorded and stored on-chain. This invariably creates no single point of failure and eliminates the supposed honeypot.
Also, with DEXs, traders are given complete control over their wallets, accounts and private keys. This is entirely different from CEXs where trader accounts and private keys are managed and controlled by the exchange. Traders in decentralized exchanges are able to transact anonymously without needing to disclose private information or go through KYC procedures.
Have DEXs become the New Normal?
While decentralized exchanges offer better alternatives for traders and prospective users, there are still a number of key challenges that, if addressed, could signal the end of centralized exchanges.
The liquidity in decentralized exchanges are still quite low when compared with what is obtainable in centralized exchanges. Many DEXs have very poor user experience and are not easy to use. Traders have grown used to centralized platforms making the transition to DEXs a bit difficult. Although, reports show the constant increase in DEX trading volumes. There is still a need to facilitate more trading volumes in order to maintain high liquidity and attract more traders and create better user experience.
DEXs are also still plagued with slow transactions and high fees especially those running on the Ethereum blockchain. With an average of 15 transactions per second, there appears to be more work needed to ensure faster transactions.
To ensure these challenges are addressed effectively, platforms like CDzExchange aim to develop a cross-chain decentralized derivatives exchange with low fees, high performance and better user experience. This removes the roadblocks that hinder the massive growth of decentralized exchanges. This needful performance boost also applies for decentralized derivatives trading.
However, do decentralized exchanges stand a better chance at replacing centralized exchanges? The answer lies in time and the effectiveness at overcoming the current challenges faced.
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