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Decentralized exchanges (or “DEXs”) have been exploding in growth all throughout 2020 and their USD volumes now far surpass the total volume of 2019 (and it’s only June)!
For those that have seen the appeal of DEXs for years, this growth comes as no surprise. DEXs offer a variety of benefits over their centralized counterparts including no KYC/AML, no collection of personal data, self-custody, fast settlement and more.
The category of “decentralized exchange” is broad so let’s break it down into its sub-categories. There are order-book exchanges like Oasis and 0x, DEX aggregators like Kyber and 1inch, stablecoin automated market makers (AMMs) like Curve and mStable, regular AMMs like Uniswap and Balancer, and layer 2-based DEXs like Loopring and DeversiFi. Then adjacent to this you have DEXs that offer more exotic products like options (Hegic), synthetic asset trading (Synthetix) and leverage trading (dYdX).
Let’s use an example to help contextualize just how much a leap forward DEXs are over their centralized counterparts. I’m going to compare doing a trade from ETH to DAI on a centralized exchange (CEX) vs doing it on a DEX like Uniswap (from scratch).
Sign up using your personal details and email (goodbye privacy)
Perform KYC/AML and wait for it to confirm (hello government)
Send ETH to fund your account (goodbye self-custody of assets)
Wait a few minutes for the deposit to actually confirm
Trade ETH for DAI (hello tax office)
Withdraw ETH to wallet (pay withdraw fee and confirm the withdraw via 2FA or email)
Wait a few minutes for your withdraw to come through
Connect your Ethereum wallet (non-custodial and no KYC)
Choose ETH and DAI and enter amount you want to swap
Approve tokens for trading (only needs to be done once per token and DEX)
Wait for the transaction to be mined
Using the centralized exchange option would of taken you anywhere from 30 minutes to multiple hours (depending on account verification time) whereas using a DEX doesn’t require any of that and all you need to have is an Ethereum wallet with ETH or some other token in it (and some ETH to pay for gas of course).
I personally think that the largest benefit here is the self-custody of assets. I really don’t like putting my assets on a centralized exchange because I have no control over them once they are deposited. At any time the exchange operator could freeze my funds for any reason and I would have little recourse (especially if the exchange is offshore). Now, of course, there’s smart contract risk with using DEXs but I still think that risk is worth it to gain all of the benefits.
One more thing I wanted to touch on was the composability (money legos) of Ethereum. This enables DEXs to interact with other apps on Ethereum and allows for things like permissionless liquidity. What this means is basically anyone can spin up a market for their new token by simply adding liquidity to Uniswap or Balancer - no need to pay a listing fee or hope a centralized exchange lists your token. On top of this, assets like NFTs (game items) can use DEX infrastructure to instantly become tradable on a global scale.
In my view, the only thing centralized exchanges are necessary for anymore is to be a fiat on-ramp or to buy coins that aren’t on Ethereum (although you can always buy crypto locally to avoid CEXs altogether). Once the fiat is changed into ETH or a stablecoin, it doesn’t have to touch a centralized service until you want to go back to fiat.
Though, we don’t go back to fiat because ETH is money, right?
Have a great day everyone!
All information presented above is for educational purposes only and should not be taken as investment advice.
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