WEEKLY CRYPTO BYTES #4
Sorry CEX, DEX is the only way to go in Crypto
Centralized crypto exchanges like Coinbase, Kraken, in crypto, are no different from traditional stock trading platforms like Fidelity, Charles Schwab, Robinhood, etc. They all have to operate within the regulatory framework of the SEC. A centralized agency cannot regulate crypto tech. That’s one of the characteristics of the blockchain tech. It has to be self-regulated.
In the last crypto bull run, we found many centralized crypto businesses become very popular quickly. And then, when FTX — the mighty centralized crypto exchange collapsed, we found a chain reaction of several other crypto exchanges collapsing. The crypto market lost billions at the time, falling below the $1 trillion valuation. Most CEXs filed for bankruptcy, and many customers, including myself, lost their investments in these exchanges.
Decentralized exchanges(DEXs), on the other hand, offer several advantages over centralized exchanges (CEXs), contributing to their growing popularity. Here are some ways in which DEXs excel over CEXs:
User Control: DEXs provide users with greater control over their funds. Instead of depositing funds into a centralized platform, users retain control of their private keys and trade directly from their wallets. This eliminates the need to trust a centralized entity with custody of its assets, reducing the risk of hacks, theft, or loss due to exchange malpractice.
Security: DEXs are generally considered more secure than CEXs. As transactions occur on the blockchain, users’ funds are not held in a single central wallet vulnerable to hacks. DEXs leverage the security features of the underlying blockchain, such as encryption and consensus mechanisms, making it more difficult for malicious actors to compromise the exchange or steal funds.
Privacy: DEXs prioritize user privacy. Since trades are executed directly between participants, users can maintain a higher level of privacy without the need for registration or identity verification. They don’t need to disclose personal information, reducing the risk of identity theft or data breaches. Most CEXs require customers to provide KYC details stored in their central database, which is more prone to identity theft.
Global Access: DEXs provide global access to anyone with an internet connection. There are no geographic restrictions, and users can participate in trading from anywhere in the world. This inclusivity allows users to tap into a larger pool of liquidity and engage in cross-border transactions without facing the limitations of traditional financial systems.
Transparency: DEXs offer transparent and auditable transactions. All trades and transactions occur on the blockchain, providing a publicly accessible ledger that anyone can verify. This transparency enhances trust among users, as they can independently verify the integrity of the trading platform.
No Central Point of Failure: DEXs eliminate the risk of a single point of failure. In centralized exchanges, if the platform experiences technical issues, suffers a cyber attack, or faces regulatory challenges, users may be unable to access their funds or execute trades. DEXs, on the other hand, distribute the trading process across multiple nodes, making it more resilient and less prone to disruptions.
Resistance to Regulation: DEXs are designed to resist regulatory interventions and censorship. Since they operate on a peer-to-peer basis without a central authority, it becomes challenging for regulators to shut them down or exert control over their trading activities. This aspect attracts users seeking a more censorship-resistant and autonomous financial ecosystem.
Few CEXs survived the FTX catastrophe, like Binance, Kraken, and Coinbase, but they are tangled in regulatory measures from SEC. The recent one is the SEC crackdown on retail Staking offerings by these CEXs.
CEXs in crypto will eventually die out, and there will be more self-regulated, censorship-resistant, and globally decentralized DEXs as crypto tech evolves.
Here is from my personal experience.
I have been doing DCA on Bitcoin & Ethereum on the BlockFi platform since 2019, as they offered good interest rates, and converting from fiat to crypto was very convenient. But after the BlockFi Chapter 11 Bankruptcy filing, my funds are blocked in the account awaiting legal confirmation.
On the other hand, I received 400 UNI tokens in my Uniswap wallet address in 2020 as part of the airdrop. At some point, they were worth $15k. I have used the funds to play around in DeFi and participated in Liquidity Pools. The best part is I can still see all the activities I have performed in the Uniswap wallet address from 2020 because they are all on the blockchain. All my funds are intact and easily accessible when I connect to the wallet address.
While DEXs offer numerous advantages, it’s important to note that they also have certain limitations. These include lower liquidity, slower transaction speeds, and the potential for front-running or other manipulation techniques. Nonetheless, DEXs continue to evolve and innovate, addressing these challenges to provide a more robust decentralized trading experience.
