In the cryptocurrency realm, decentralized exchanges (DEXs) and centralized exchanges (CEXs) have operated in parallel for several years. When beginning their crypto journey, every investor has to choose between a CEX and a DEX. Despite the pillar of decentralization that underpins many cryptos, CEXs have largely leapfrogged their decentralized counterparts in the last few years.
Centralized crypto exchanges, such as Binance, Kraken, Coinbase and others, usually follow a business model mirroring traditional retail brokerage and online trading platforms that make buying and selling easy, which is why they are so popular among investors. These platforms match buyers and sellers via their own order book, which records and validates every order. CEXs facilitate internal data exchange between parties via dedicated servers alongside highly centralized security processes.
As a rule of thumb, all CEXs are bound to operate within the regulatory framework of individual jurisdictions and follow the required KYC and AML guidelines. Since CEXs often operate under the supervision of regulatory authorities, it provides an added layer of assurances for investors despite the “wild west” nature of cryptocurrencies.
Another reason behind an increasing number of investors flocking toward CEXs is that there is no liquidity shortage across these platforms. Compared to decentralized platforms, the trading volume across CEXs is meaningfully higher. Additionally, the trading speed is also remarkably high since there is no need to update every network node in real-time like DEXs.
Adding to the functional advantages, CEXs offer straightforward interfaces, easy fiat on-ramps and the option to purchase cryptocurrencies with various payment methods (credit and debit cards, wire transfers, ACH, third-party gateways, and much more).
While CEXs have played crucial roles in helping expand the crypto ecosystem by lowering entry barriers, these massive for-profit ecosystems have a few shortcomings. The most problematic part with CEXs is their custodial wallets. Investors must hold their assets in the platform’s wallet, meaning that the CEX you signed up for exerts full custody over your assets.
Letting a third-party manage the key for your wallet simply means that whatever assets are in the wallet aren’t truly yours. And this isn’t just about ownership; it’s also about the security of investors’ assets. By leaving the key to your wallets with the CEX, you’re wholly reliant and bound to the security measures implemented by the platform.
Effectively, investors must compromise ownership and control for ease of use and convenience.
By contrast, DEXs give investors complete control over their keys and assets. DEXs are designed to facilitate peer-to-peer trade; accordingly, the average maker-taker fee usually sits on the lower end of the spectrum. Additionally, there are no rigorous KYC and AML policies. Compared to CEXs, you’ll find a wide variety of tokens and access to DeFi primitives through DEXs.
Still, DEXs are accompanied by their own set of drawbacks.
First, the lack of a comprehensive regulatory framework makes DEXs a hotspot for price manipulation. Second, DEXs often don’t have sufficient liquidity because of low trading volumes. Moreover, each DEX operates on a different blockchain. Blockchains, by design, operate in individual environments, resulting in fragmented liquidity. Finally, DEXs don’t generally focus on user experience and can’t match up with the trade settlement speed offered by centralized platforms, making conditions even more challenging for investors.
Herein lies the problem. Investors must compromise on ease of use and convenience if they want full custody over their private keys and crypto assets.
The Workarounds Shifting the Equation in Favor of Users
Choosing between a CEX and a DEX is a perpetual dilemma that has been haunting investors for years. There is no straightforward answer to the puzzle as the choice depends entirely on the investor and their individual preferences.
Fortunately, a few potential solutions have emerged in recent years. Most of these solutions combine the best features of centralized and decentralized exchanges to provide users with a unified interface that delivers convenience without compromising on custody.
Take, for instance, Unizen. The smart exchange platform provides investors with access to deep hybrid liquidity aggregated from all CEXs, DEXs and swap pools via a single dashboard. By following a CeDeFi model — a blend of centralized and decentralized financial services — Unizen endeavors to deliver the best available prices and fees across the market without the need for investors to monitor every movement across every platform individually. The platform also adheres to the required KYC, AML and other regulatory guidelines, while ensuring trades at lower slippage, faster settlements and minimal fees.
Another potential solution to address investors’ dilemmas is Solana’s native wallet Solflare. The Solana team recently integrated its Solflare wallet with the centralized and highly regulated crypto exchange FTX US and FTX.com. Through this integration, investors can access FTX’s centralized finance (CeFi) products and services and Solana’s expanding ecosystem of decentralized finance (DeFi) primitives through a single, non-custodial and KYC-verified wallet.
Solflare users with existing FTX accounts can simply connect their KYC-verified FTX accounts with their Solflare wallet to access and seamlessly transfer their funds between custodial and non-custodial wallets as needed. Furthermore, this integration also implements the Solana-native FTX Convert feature, enabling users to quickly swap tokens using their FTX wallet balance with other available tokens via the Solflare wallet.
As the crypto ecosystem continues to expand into new horizons and mature, CeDeFi solutions have positioned themselves as a potent catalyst to lower crypto’s entry barriers. By merging the best features of both ecosystems within intuitive interfaces, CeDeFi platforms and their connectivity can deliver an improved user experience that doesn’t compromise control of assets or available capabilities, helping crypto live up to its decentralization ambitions.
(Reuben Jackson is a blockchain security consultant and crypto writer.)