The digital asset exchange market is booming

CoinMarketCap alone lists over 300 exchanges. Although most of them are centralized, times are changing.

The trend towards decentralized finance (DeFi) is reshaping today’s global economy. The very way we use money is being reinvented. Users can invest, lend and earn interest with their cryptos on platforms governed by decentralized algorithms.

The aforementioned activities take place in decentralized exchanges (DEXs), which have great future potential. DEXs have gained popularity amid the buzz around DeFi products, while the rush to #Uniswap, a decentralized exchange, has revived the discussion about the benefits and drawbacks of decentralized versus centralized exchanges (CEXs).

Despite peaceful coexistence, the decentralized trend is growing. A case in point was a recent development in the DEX space, where Uniswap outperformed one of the largest cryptocurrency brokers, Coinbase in terms of daily trading volume.

The question, however, remains—how do these two types of exchanges differ from each other?

Centralized and decentralized exchanges are fundamentally different from each other.

CEXs provide a user-friendly platform that makes it easy to purchase and manage digital assets.

They are regulated by regulations and have strict know-your-customer (KYC) practices in most cases. As the network nodes do not need to be updated in real time, the number of orders and transactions is usually much higher than in a DEX.

A decentralized switch, however, also offers basic CEX functionality. Order books, a trading platform, a matching engine and security services are among them. Uniswap, SushiSwap , Bisq and GDEX are great examples of decentralized exchanges. While aggregators such as 1inch allow users to find the best possible exchange.

Since limited user data is required to execute a trade, DEXs are completely anonymous. There are no third parties (financial authorities or regulators) who monitor or enforce the exchange rules, as is usually the case with centralized exchanges. In DEXs, protocols reign supreme.

DEXs operate directly on the blockchain without a central government authority.

The decentralized protocol inspires confidence in the system and allows the negotiation of cryptocurrencies to take place. The benefit is — users can trade immediately without logging in, keeping control of their private keys at all times. As for fees, users have to pay the network to carry out the negotiation. The downside, however, is that cryptocurrency exchanges remain completely anonymous.

When it comes to centralized DEX counterparties, companies like Binance, Huobi and Kraken run currency swaps within their own infrastructure. In contrast to a DEX, trading activity is always controlled by a third party, which the user must trust to execute the trade. High liquidity and fast transaction speeds are reasons why centralized exchanges remain attractive to traders. Users are paying for the transaction, both on the manufacturer and borrower side. This comes in addition to the network fee.

Despite the fact that CEXs have been quite successful over the past decade, with Coinbase making a public debut and Kraken reflecting on it, the rise in decentralized exchanges cannot be underestimated. Month by month, several tens of billions of dollars remain locked in decentralized protocols. Another important factor — increasingly centralized exchanges are adding DEX-like functionality to their ever-expanding range of services. As a result, it is safe to assume that we will see both exchange types merge into one. This can mean greater liquidity, lower fees, less centralized governance, and more freedom around what users can and cannot do with their cryptocurrencies.