The Gap Between DEXs and CEXs Is Closing

The growing popularity of decentralized exchange platforms over the last year suggests that the gap is closing between them and their centralized equivalents. DEXs, as they’re known, are peer-to-peer trading platforms that enable cryptocurrency traders to buy and sell digital assets without putting their funds into the hands of an intermediary, reducing risk.

In the early days of crypto, trading was only available through centralized platforms or CEXs, but it quickly became apparent to the community that such venues stood in contrast to everything crypto stands for. Crypto is all about decentralization and giving control back to the people, and so the need to trust a centralized organization naturally goes against this ethos. CEX platforms are more akin to a traditional bank, with users required to deposit their crypto within its wallets and trust that it will keep those assets safe.

The dangers of trusting a CEX became apparent in the early days of crypto. Back in 2014, Mt. Gox was the pre-eminent exchange of the crypto world, processing more than 70% of all Bitcoin transactions at its peak. However, in early 2014 the exchange was hacked and lost most of its depositor’s funds. It was forced to suspend withdrawals and later filed for bankruptcy, owing its users millions of dollars that still haven’t been recovered to this day.

DEXs emerged as a solution to this problem, using innovations such as automated market makers and smart contracts to enable trades to be executed without any intermediaries. Users retain control of their funds within their own wallets, and are responsible for safeguarding their private keys.

The Risks of Centralized Trading

Despite the Mt. Gox episode, CEXs have continued to dominate the crypto trading world, only for the dangers to once again become apparent once more with the sudden collapse of FTX, the world’s second-largest exchange by trading volume, in late 2022. Once again, the incident left thousands of users unable to access their funds, prompting many investors to move from CEXs to DEXs.

In November 2022, the overall trading volume on DEX platforms hit $91 billion, up 79% from the previous month, according to data from Dune Analytics. Moreover, DEX’s saw their spot trade volume increase from 10.8% in September 2022 to 16.7% in November, with that additional market share coming at the expense of CEXs.

By far and away the biggest DEX platform is Uniswap, and its dominance helped it to secure a big milestone when it surpassed the top CEX platform in the U.S., Coinbase, in daily trading volume for the ETH/USDC pair in November.

Data from The Block shows that DEX trading volume continued to grow steadily from Nov. 2022 until around April this year, gaining market share at the expense of their CEX brethren. And although DEX growth has since tailed off, it seems clear that the disaster at FTX and similar mishaps at other CEX platforms, such as Celsius Finance and Voyager, has improved the fortunes of most decentralized platforms.

The DEX Advantage:

One of the main selling points of cryptocurrency is that it’s able to empower people to use decentralized technology to protect themselves from censorship and the risky actions of intermediaries who control their finances. The damaging actions of the executives responsible for FTX and other shady CEX platforms has only reiterated this advantage. What happened at those platforms is precisely what crypto is supposed to prevent.

As those centralized platforms imploded, decentralized protocols were given an opportunity to demonstrate their ability to protect users even in times of chaos. They didn’t pass up the chance, showing their ability to continue operating smoothly, while the networks that power cryptocurrencies like Bitcoin and Ethereum kept going without a hitch.

Although it will be of little consolation to those who lost money, the FTX episode revealed that crypto works exactly as intended. If users want to protect their finances and investments, the only way to do so is to maintain control, which can be done by putting their trust in decentralized protocols and self-custody of their digital assets.

The problem for many users is that most DEX platforms are difficult to navigate compared to their centralized counterparts. In addition, many users remain fearful of having to safeguard their private wallet keys for themselves, knowing that if they lose this, they will lose access to their funds forever.

One possible solution is to look at protocols that attempt to bridge the gap between CEXs and DEXs while ensuring that users retain full control of their funds. For instance, the cross-chain CEX and DEX aggregator RocketX provides a way for users to navigate the crypto ecosystem in a seamless way, interacting with every blockchain via a single interface.

With RocketX, users can trade tokens across any platform, tapping into the liquidity of the industry’s top CEXs and DEXs via one location. They can do so via a simple UI, accessing competitive rates on all swaps and without taking any of the risks associated with leaving their funds in the custody of a CEX platform.

Closing The Gap

Presently, CEXs continue to sit at the top of the tree in crypto trading, as they generally provide better user experiences together with fiat onramps, more liquidity and measures that enable users to regain access to their accounts if they lose their password.

Still, these are all problems that DEX platforms can address, and indeed many are striving to do so. On the other hand, CEXs have no easy way to address the inherent risks that come with centralization. As such, there are lots of reasons to think that DEXs will continue to take market share and slowly but surely close the gap between themselves and CEXs.