CEX vs. DEX: the former still “in the saddle”, the latter not far behind

    20 Jun 2021

    Centralized (CEX) and decentralized exchanges (DEX) are natural competitors in the cryptocurrency market. It’s somewhat surprising that from the very beginning quite centralized structures – crypto exchanges – have grown into real giants in what initially was (and by definition is) such a decentralized industry as the cryptocurrency. However, blockchain technologies are evolving, and so recently DEXes have been getting more functional, and therefore gaining popularity.

    The price of BNB, the largest centralized crypto exchange Binance’s own token, at the time of its release a year ago was $ 16.31. It reached an all-time high of $ 664 on May 10 of this year, and now it stands at about $ 360.

    This growth is entirely justified and is directly related to the overall growth in demand for cryptocurrencies in 2020-2021. Exchanges always make money in bull markets, and Binance, launched in 2017, was probably best prepared for the current crypto boom. This is the largest trading platform (not to mention, independent of fiat settlements), and BNB tokens are its de-facto shares.

    The market price of Binance Coin was strongly propped up by the development of the Binance Smart Chain (BSC) blockchain, that has at one point bypassed Ethereum in the number of daily transactions. The thing is, at the beginning of this year Etherium transactions became very expensive: commissions rose to historic highs of more than $ 20. Then, many started using the BSC blockchain as an alternative – essentially a copy of Ethereum, but using Binance’s own blockchain.

    However, it looks more and more like 2020-2021 is the last bullish season for Binance and other major centralized crypto exchanges. Yes, they are still ” in the saddle “: the monthly trading volume of centralized cryptocurrency exchanges in May reached a new all-time peak, exceeding $ 2 trillion, Binance leading with a trading volume of nearly $ 1.5 trillion, followed by Coinbase at $ 200 billion.

    Decentralized exchanges don’t come close to reaching these numbers yet. Trading volumes on DEXes in January 2021 grew by 136%, reaching $ 53.4 billion, which was a record at the time. In February the figures reached $ 67 billion, followed by a slight decline.

    And yet, supporters of decentralization are full of optimism: first, there has already been amazing growth. A year ago DEXes showed very modest numbers, remaining a kind of an “alternative for crypto geeks” – mostly due to limited functionality and low speed (the main problem with DEX).

    But the second half of 2020 proved to be triumphant for them.

    Source: Coindesk (https://www.coindesk.com)

    Secondly, thanks to the rapid development of DeFi, advanced solutions such as zkSync, Optimism, StarkWare and others, as well as blockchains such as Solana, have all entered this sector. This means that quite soon it will be possible to create a large crypto-exchange with a bandwidth no worse than that of any centralized one. What’s more, it will have a much larger number of traded coins and tokens without the need to store user funds on exchange accounts (the main problem with CEX).

    Some developments are already out there – just look at the progress of such platforms as IDEX and dYdX decentralized exchanges. When at the time of the crypto-boom dozens of new assets are launched every day, centralized exchanges are just physically unable to keep up with adding them and creating liquidity for them. CEXes become hostages of several dozen largest cryptocurrencies and the most popular tokens, but cannot cover young and growing markets.

    That means that users are gradually starting to move to places that require less personal data and provide more opportunities for trading. Although, of course, the prospects of such giants as Binance are still bright – all thanks to an established image, technical solutions, qualified specialists and marketing budgets.

    Today, the most popular decentralized trading platforms are UniSwap, SushiSwap, Curve, Ox, and Bancor. For the longest time development of decentralized trading platforms was constrained by high fees for making transactions within the blockchain. But this problem was eventually resolved. For example, the DMEX exchange transferred transactions from the Ethereum blockchain to its own solution developed by the exchange’s team – the xDAI sidechain. It made recording user transactions possible at a significantly lower cost. In a situation of sporadic jumps in the price of gas within the Ethereum network (with the same DeFi “to blame”, by the way) this has become incredibly relevant.

    You could even call it a turning point. Previously, the high level of transaction costs was a powerful argument in the competition between decentralized and centralized platforms. Now that this problem has been solved, the problem with DEX’s low speed still remains. But they have a clear advantage – anonymity. That is, they do not implement AML procedures and rules, which are often very inconvenient. In addition, DEXes are not afraid to trade anonymous cryptocurrencies such as Dash or Monero, they won’t block user funds at the request of the authorities, etc.

    Today, decentralized exchanges operate on a “come and trade” principle. Once upon a time, their centralized competitors grew with it, but that was a long time ago, before the introduction of complex verifications and all the pressure from regulators. To summarize, the capitalization of CEXes is still growing, but DEXes are very quickly gaining popularity and improving technically. By the end of the year the latter of course won’t overtake the former yet, but will certainly present a very serious competition.

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