As the cryptocurrency industry developed, various platforms for trading tokens began to appear on the market. They can be divided into two categories: centralized (CEX) and decentralized (DEX).
CEX platforms are operated by commercial companies and are actually no different from, say, a stock exchange or any other exchange. Such legal entities act as an intermediary between the buyer and the seller and are a third party.
DEX exchanges are not operated by any entity, but are based on the cumulative operation of smart contracts. In fact, a third party is ruled out in this model. Assets are transferred from user to user directly through the blockchain. In turn, the DEX platform offers people a visual interface and a predefined set of technologies.
Why can DEX compete with centralized platforms?
DEX exchanges directly depend on the technological development of the entire crypto industry. That is why the first decentralized platforms they did not receive much attention appeared in 2014. At the time, DEX projects simply could not provide the same level as CEX platforms.
However, a lot has changed since then: smart contracts were invented, user listing technologies began to be used, automatic market makers and liquidity pools were introduced. This allowed decentralized websites to reach the same level as their CEX competitors. At the same time, DEX exchanges have not lost their advantages, which fundamentally distinguish them from projects with centralized management.
All CEX exchanges employ a Know Your Customer program, also known as KYC. In accordance to it, each new user must prove their identity before starting to operate on the website. In addition, the customer is often required to explain the origin of the capital and undergo some other verification procedures. In a negative scenario, access to assets on the exchange may be restricted.
Little-known projects sometimes abuse their regulatory function and withdraw the capital of investors and customers under the guise of complying with legal requirements and rules. Of course, this is quite rare, but still cannot be completely ruled out.
There is no such problem on DEX platforms, because cryptocurrency is transferred from peer to peer and does not pass through third-party wallets. This is why it just cannot be blocked. In addition, there are no verification and other checks on decentralized platforms, as a rule.
Safety of stored funds
When trading on centralized platforms, users rely on their protection measures, otherwise all their assets can be stolen. This hope turns out to be ill-advised often. It must be remembered that the wave of the DEX projects popularity began against the background of some high-profile CEX website hacks. They include not only small industry players, but also large well-known platforms that are still operating.
In turn, DEX websites are simply devoid of such a vulnerability. All assets used for trading not stored not with a third party, but in the users' personal wallets. Even if the website is hacked, attackers will not be able to easily access people's funds, especially if they follow the basic principles of digital security.
Listing new tokens on CEX exchanges can take months, because it requires approval from many decision makers in companies. This is why platform users get the opportunity to buy tokens only after a long period.
At the same time, adding a token to the DEX website can take just a few minutes. This is possible thanks to the automatic listing technology. As a result, participants in such an exchange can buy coins of interesting projects at the earliest stages. In addition, rare cryptocurrencies can often be found traded on decentralized platforms but cannot be found on large centralized exchanges.
Drawbacks and technologies for their solution
Of course, decentralized crypto platforms have their drawbacks. For comparison, almost all of them work within the same blockchain, which makes it difficult to exchange coins from different networks. In addition, transactions go through the blockchain, which increases the fees for the exchange as well.
However, these and other problems are being solved through the introduction of new technologies. For example, Chainflip is developing alternatives to wrapped tokens and vulnerable niche wallets. Due to this, the project will be able to expand the number of potential exchange directions and eliminate the need to use centralized exchanges, which are often required to change the blockchain.
Another project, ErgoDex, is going to combine CEX-specific order books and AMM within one system. As such, this startup can become not only a new promising platform for the exchange of cryptocoins, but also a full-fledged platform for convenient trading.
Another interesting product, known as Relictum DEX, is currently creating a special hash chain and block architecture in MasterChain. In particular, it is therefore expected that the project network throughput will reach 1 mln transactions per second. In addition, the developers assure that the platform will not charge fees from the users at the initial stages of development.
Various projects, including these ones, generate innovative developments that make decentralized platforms more secure, convenient, and functional. At the same time, CEX projects cannot do anything about their main disadvantage – centralization. It is their fundamental feature, which does not allow eliminating the above-mentioned advantages of DEX platforms.
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