June 13, 2022
In the early days of cryptocurrencies, acquiring bitcoins and other tokens was very complicated involving a lot of steps. With the rising popularity of digital assets, many service providers came forward searching for new methods to improve and enhance user experience. However, the arrival of third-party exchanges in the trading process is considered to be a breakthrough in the whole cryptocurrency market.
Centralized Exchanges (CEXs) are digital exchanges that are operated centrally. They have given an immense contribution to the growth and acceptance of digital assets like Ethereum, Bitcoin, etc. Their smooth user interfaces helped people to buy and trade digital assets easily. CEXs work similarly to the conventional stock exchanges. They monitor the digital assets before listing and offer the same overall trading using order books, procuring or providing liquidity, remanding assets, and leaning towards trade settlement. With the latest features like derivative, margin, and options trading, CEXs have improved their security measures to safeguard the digital assets that are in their custody. Some CEXs issue native coins serving the role of an intermediary in the trade settlement processes.
Decentralized Exchanges (DEXs) can be considered as an alternative that is in collaboration with modern decentralized finance (DeFi). They allow direct trade of digital assets between the users using automated smart contracts. DEX protocols make use of smart contracts for the transactions to conclude automatically as long as the required conditions are completely satisfied. Every automated transaction will be stored on the blockchain. The user experience and the interface are similar to CEXs, but there are many differences between both. DEXs do not have custody power over digital assets and the private keys of the assets in the digital wallets are maintained by the user. DEXs do not feature fiat settlement; their operations are limited to the trading of digital asset pairs. However, if the buyer and seller get matched, a wide array of digital assets are allowed to be traded using DEXs even without high trade volumes. Mostly, DEXs are developed on the Ethereum blockchain. Users will be paying a transaction fee instead of brokerage fees charged by the exchanges. This fee is calculated according to the computational power needed to carry out the transaction. However, the regulations that come for DEXs are still unclear as they are still under evolution. But some regulations of CEXs apply to DExs too.
CEXs are the dominating entities in the digital asset trading market currently. But, DEXs are showing rapid growth and play a vital role in the rapidly flourishing sectors in the blockchain as well as the financial technology ecosystem. Several CEXs have adopted DeFi initiatives and functionalities to provide a better user experience. They are executing and adopting functionalities like blockchain relayers or wallets that can communicate with CEXs. As the regulatory environment is continuously evolving, entities that are planning to function in the ecosystem must be aware of the major regulatory operators and should build their initiative following them.