Decentralized or centralized exchanges? This is the dilemma of the crypto world.
The current scenario sees centralized exchanges in pole position, platforms that control the movements and exchanges made by its users between fiat and cryptocurrencies or between cryptocurrencies themselves.
Obviously, this occurs because the service offered remains very simple and full of features even for the most experienced traders, providing a good user experience.
It can be said that centralized exchanges, compared to the decentralized ones, have in a sense paved the way for cryptocurrency trading.
But if the blockchain revolution is based on decentralization, then why not stay in tune by choosing equally decentralized exchanges, the DEXs?
DEXs are completely on-chain exchanges: all the operations carried out by the orders, the cancellation of orders or crypto transfers, take place on the blockchain of reference, leaving to the user the responsibility and the full mastery of their own actions, and above all the encrypted keys.
On the other hand, every operation on the chain requires distributed confirmation and therefore a relatively long wait (sometimes minutes and sometimes even hours) and payment of fees.
Moreover, when the confirmations are directly on the chain users can also participate in the front-running which consists of intervening by spending more fees when a transaction is pending, so as to be “mined” first, even if this inevitably leads to an inequality that is not part of the “philosophy of decentralization”.
The user experience of a DEX is, therefore, more expensive and slower than that on centralized platforms, as well as being very basic and with less offer of liquidity.
For this reason, there are hybrid DEXs, a mix between on-chain and off-chain: some operations are performed outside the blockchain, leaving the platform a way to manage the sending of orders for the user, thus resulting in lower cost and faster transactions, as well as overcoming the problems of front-running. The user, therefore, relies on a third party but only for the management of the order book, and not for the custody of the cryptocurrencies.
Compared to centralized platforms, hybrid DEXs make the user experience easier. The custody of the cryptocurrency or token transfer remains in the hands of the user, so it is a lower risk compared to a centralized wallet.
Looking to the future.
Looking at the trend of some DEXs: 0x, OasisDEX, IDEX and Etherdelta you can see how the growth of volumes is in some cases stagnant or falling, and especially how the concentration is on currencies not listed on centralized exchanges.
Assessing the trend of the latest ICOs, if the future of DEXs is in the hands of new cryptocurrencies not yet listed by the centralized platforms, it is difficult for it to improve its performance.
Another consideration is the legal aspect. While centralized exchanges have to follow the regulation like private companies, DEXs do not even meet FinCEN (KYC /AML) requirements, so there is no control whatsoever.
The last thought is for the user. As long as the end user does not perceive decentralization as an aspect of power that technological innovation is trying to transfer to everyone in the world, and that the right to own one’s own private keys is synonymous with freedom, power and above all responsibility for one’s own actions, it will be difficult for DEXs to gain the right momentum by looking for solutions that can replace centralized ones.