From CEXs to DEXs
Last updated
Last updated
Trading in cryptocurrencies has come a long way since the launch of Bitcoin. In the graph below, the possibilities in obtaining cryptocurrencies are represented chronologically with the respective global market capital at the time. The timeline is divided in three: the CEX era, the adoption of DEX trading, and the future of DEX trading. All three are explained further below.
Centralized exchanges (CEXs) allows for purchasing cryptocurrencies with FIAT. Orders are processed in traditional orderbooks. Also, the dashboards are easy to use, offering many order types. This makes CEXs highly efficient and effective for trading cryptocurrencies.
Despite all the advantages CEXs offer, there are some problems that have occured and are still occuring. Some of these are grand scale hacks, resulting in enormous losses of the CEXs' users. Another negative aspect of CEXs is that they are forced to obey KYC regulations. Also, they have limits in terms of order book size and they require the user to trust the solvency of the business, something often seen as a negative by native crypto users.
A combination of these issues, along with the development of smart contracts, eventually led to an elegant solution: an exchange platform built entirely on crypto, in a completely trustless and decentralized manner – a decentralized exchange (DEX).
DEXs have a few significant benefits over centralized exchanges. They do not require KYC and are a totally trustless trading platform. They allow investors to invest in many more projects that do not have access to CEXs. Also, the smart contract code is open and transparent, allowing crypto natives to simply verify the code instead of trusting a centralized business to be solvent.
However, there are some difficulties traders face while trading on DEXs. These are a lack of various order types, a clear overview of portfolio and trading activities, and safety issues. More on this in Difficulties.
