Decentralized vs. Centralized Exchanges: a Comparative Analysis

I, Viktor Kochetov, CEO at Kyrrex, a digital wallet and professional cryptocurrency trading platform, put centralized and decentralized exchanges on the scales, weigh the pros and cons, and provide traders with food for thought in their decision making.

The healthy development of the crypto environment depends on the responsibility of each stakeholder. The initial idea of crypto world as a new alternative to the old traditional paradigm can be fulfilled on one condition: everyone engaged in the sphere carries their own work with dedication.

The community is getting itself together and has finally recovered from hysteria. It has become clear that crypto is not about rolling the dice, but is about making tough decisions. Hard choices start long before ‘to buy or not to buy’; everything begins with picking a crypto exchange. At this point, you put yourself in one of two scenarios.

Either you work with professionals, reap the benefits and enjoy your ride, or you hand in your assets to rascals in disguise, and end up broke and disappointed. So, by the time you go through the list of exchanges, you have to be armed to the teeth, and knowledge is the best weapon.

Cryptocurrency is traded on two types of exchanges — centralized and decentralized. There has been a lot of speculation on whether centralization, as a phenomenon, is relevant in the realm of crypto. Many people argue that centralized crypto exchanges run counter to the essence of transparent decentralized ledger.

It is my firm belief, that in the crypto world nothing is black and white.

There are many halftones between the two concepts, and the question we should ask ourselves is ‘to what extent an exchange must be decentralized?’. Imagine that there is such a thing as complete decentralization, then, wouldn’t it lead us, social human beings, to disarray?

Decentralization of exchange: what it means

The decentralized exchange implies trading cryptocurrency without intermediaries directly through the blockchain. Decentralized cryptocurrency exchanges, or DEXs as we know them, do not have access to customer’s assets, information; they serve as the layer for trade orders that executes matching and routing functions.

We can’t deny that the aspect of security is the one that rises to the forefront: there’s nothing to steal. The usage of smart contracts brings autonomy and anonymity, P2P transactions. Other than that, a different approach to architecture bears a lot of constraints and limitations.

A DEX user is deprived of a huge amount of opportunities and services that are normally provided on centralized exchanges. These features cannot be implemented on the decentralized due to technical issues. Decentralized exchanges are essentially exchangers with limited functionality.

This is the main reason the dwellers of centralized platforms are not very enthusiastic about the transition to decentralized ones.

Nowadays, the user experience of decentralized exchanges can be described as horrible, without any exaggeration. The customer’s journey reminds us of quests and riddles — the steps can be really confusing. In order to exchange one cryptocurrency to another, a user has to perform several transactions.

While the digital population wants their apps and platforms to be intuitive and easy to use, DEXs still cannot correspond to these realities.

Let’s go back in time and recall those ancient pioneering websites — slow and awkward. The same feeling you get while trying to interact with DEXs: UX and UI leave many questions. In terms of fiat-crypto exchange, decentralized exchanges do that exclusively, they do not take other payments other than cryptocurrency.

Transaction speed is another issue worth mentioning. Since the exchange process itself must be directly recorded on the blockchain, the user will conduct his transaction only after the miner conducts the transaction. This aspect may not be a significant factor for small-sized operations.

But, for trading giants who carry out huge-volume transactions in a matter of moments, via algorithmic robots, transaction processing time is a substantial indicator.

Regarding the human factor, which adds uncertainty to technological advancements, choosing a regulated crypto exchange can help avoid scams and give some peace of mind. However, regulatory rhetoric is out of place in the context of decentralized exchanges. Due to the distributed nature of DEXs, regulators and governments are not empowered to interfere and control. Also, nothing can be insured. There is no physical location, moreover, there is no physical manifestation of an exchange.

The unenviable position of DEXs is responsible for low trade volumes and insufficient liquidity, which explains the inability to compete with centralized exchanges.

Centralization is inevitable

Centralized crypto exchanges are prioritized by the traders of different levels. The reasons are mainly related to convenience, sufficient functionality, and a huge number of additional services that traders are not ready to compromise. Unlike decentralized exchanges, centralized ones approach security through regulation and superb transparency. When the exchange is regulated by a jurisdiction, its moral and ethical principles are stipulated by the law.

Trust, as the most valuable asset of crypto business, is grounded on the clients’ confidence that their financial well-being is not threatened. In this digitalized era, these are the basic guarantees we can and need to provide traders with.

Approximately 99% of crypto trade is fulfilled via centralized crypto exchanges. CEX is a full-fledged organization that oversees a set of daily procedures such as maintenance, security and growth. The centralized crypto exchanges, or CEXs, play the part of mediator — a platform connecting buyers and sellers. More prominent industry players provide an extensive list of additional services, trading options such as lending, margin trading, high-volume trading discounts, institutional trading tools etc.

Centralized platforms build the bridge between fiat and crypto, thus, they accept debit and credit, bank transfers, so the two-way exchange is executed seamlessly. From an architectural standpoint, centralized crypto exchanges are often guilty of sameness and monotony. In this case, you have to turn to the platforms which were built by teams with a vast financial background. The point is, the industry has been nurtured by fanatics and enthusiasts whose emotional element overshadows practical skills and understanding — this is where the architectural issue comes from.

We have paid a lot of attention and poured our knowledge into building the trader’s workspace to provide personalized, customized service. A major challenge in this area is to balance massive functionality with ease of use. This is the exam where many fail.

When speaking about centralized exchanges, we mean the following layers: UI, administration, trading engine and, of course, database. As long as there is a huge amount of customer information being saved, this is what presents interests for hackers.

To be fair, the magnitude of scams and frauds is immense, and even the largest market players fall victims and face reputational damage. Reacting to hacks is an inadequate measure today; treating security as a one-time event means living elsewhere but in the real world.

In order to ensure proactivity and predictability, security of crypto exchanges must be a well-managed continuum.

If centralization contradicts the nature of cryptocurrency, then complete decentralization contradicts human nature. In decentralized environments deprived of control, supervision, both leaders and their followers will bring nothing but chaos.

I believe that the nearest future will bring us a new type of trading platform which will be a hybrid option between decentralized and centralized cryptocurrency exchanges.

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