As the crypto world continues to evolve, many questions still remain unanswered. One of which is whether the centralized exchanges provide that much needed regulated ecosystem and environment for the digital assets and trade to flourish and achieve mainstream popularity. Are decentralized exchanges the Future of our economy? Decentralized exchanges or DEXs allow the trading of various digital currencies among the end-users without depending on any trusted intermediary. It ensures that users can keep their funds.
The future trajectory of the crypto world depends largely on two main factors – scalability and regulations. There is no doubt that DEXs do have its own set of advantages, but in its current form lacks regulations and the ability to scale up to integrate with the mainstream financial landscape. In the present situation, centralized exchanges would play the key role and ensure sufficient liquidity facilitated for the crypto community to flourish. DEXs do not require its users to go through the KYC procedure as it tends towards not being highly regulated. The DEXs are primarily peer-to-peer marketplaces running on blockchain platforms, with smart contracts being its pillar. With that said, it would be wrong to believe that there DEXs do not have any liability.
Customer protection has become a major factor for any financial body to achieve mainstream prominence. It is for this very reason; it would be difficult for the DEXs to continue to avoid regulations or bypass financial regulations. The centralized exchanges are far ahead in this regard as they are highly regulated and also have KYC processes in place. The centralized exchange’s KYC and verification processes are in line with compliance laws, including anti-money laundering, terrorism-financing laws, and other financial regulations.
Even though decentralized exchanges are gaining massive popularity globally, its volume and liquidity are way lesser than the centralized exchanges. Due to the massive scale at which the centralized exchanges operate, it helps these exchanges contain any extreme volatilities and market swings. Bitfinex is one such exchange that has the highest depth of liquidity for both ETH and BTC. Its depth and strength were clearly visible during March 12th and March 13th when Bitcoin’s price snowballed by more than 50 percent. Bitfinex is the exchange that represented a majority of the trade volume during that period.
There is a possibility that the node operators can front-run the user’s trades because everything is visible on-chain, including details of every transaction and order. It is one of the biggest reasons standing on the way the users get a good trading experience and is also hindering the growth of the crypto community by large. However, due to its limited capacity, the DEXs would continue to drive growth and scale gradually. As per the claims made by the fastest blockchain, more than 50,000 transactions can take place in a second. It is a claim based on a single product, but if more than one product is ordered, the capacity reduces to just below 500 trades/transactions per second per product.
As more and more products are getting into the ecosystem of DEXs, it is causing more network delays than earlier. The increase in transaction fees is also one of the major issues when it comes to scalability, as seen in the case of Ethereum. The centralized exchanges are highly scalable and performance-oriented due to its massive infrastructure and connectivity. It is what has allowed investors and traders to trust centralized exchanges more. The Centralized Exchanges continue to scale up to date and are now offering non-custodial solutions like in DEXs. It has hugely and positively impacted the end-users’ experiences while remaining compliant.