Pros and Cons of Centralized, Decentralized, and Hybrid Exchanges

If you’re ready to trade cryptocurrency, you will need an exchange; there are plenty of exchanges out there to serve you, ranging from mega-exchanges like Coinbase, to altcoin exchanges that focus on markets for niche tokens.

There are many different models for running exchanges, but we can divide those models into three general categories: centralized exchanges (CEXs), decentralized exchanges (DEXs), and a new kind of exchange pioneered by Amplify, the hybrid exchange.

You might be wondering how these exchanges differ from one another, and why Amplify is making a case for a hybrid exchange over the traditional CEX or DEX models? Let’s take a closer look at the pros and cons of each model:

Advantages and Disadvantages of CEXs

According to statistics, if you trade cryptocurrency, you most likely do so on a centralized exchange.

An October analysis of trading volume for the top three centralized exchanges and top three decentralized exchanges at the time showed that trading on DEXs only made up .25% of all six exchanges’ combined volume.

Individuals tend to cite security and privacy issues as the drawback of centralized exchanges; on a CEX, traders must deposit their funds into a pooled-wallet, a wallet that aggregates every CEX users deposits, and stores and distributes that data from one central location. Because CEX’s typically use a centralized server, hackers only have to break into one centralized location to drain all of the wallets’ funds, which makes them an attractive target for theft. Experts estimated that in late 2018, thieves stole an average of $2.7 million per day across the year.

Furthermore, there are other reasons to eschew centralized exchanges; some crypto traders philosophically oppose the notion of centralizing an inherently decentralized concept like blockchain technology, while some dislike that centralized exchanges mandate identity-revealing KYC procedures, and others resent CEXs’ higher fees.

Considering the shortcomings and limitations of a CEX, you might be wondering why CEX’s are so popular? The short answer is that they’re user-friendly. Virtually all exchanges recommended to crypto beginners are centralized exchanges thanks to their user-friendly interfaces; this is because the technical aspects behind centralized exchanges are relatively simple. The exchange’s ledger updates the exchanges internal database regarding who owns what at different points in time; this centralized server/distributor model makes trading faster and highly liquid. A centralized exchanges’ simple structure also allows users access to many popular trading pairs (e.g., bitcoin-to-fiat) that are rarely available on decentralized exchanges.

Pros and Cons of DEXs

Due to security and privacy, blockchain’s ideological purists flock to decentralized exchanges.

DEXs vary in structure, and some have been accused of advertising themselves as more decentralized than they really are. The quintessential DEX interfaces directly with blockchains and distributes essential exchange processing power across a network of nodes to facilitate direct wallet-to-wallet exchanges.

Working without an intermediary — a centralized server — allows traders to make peer-to-peer transactions which give customers more control over their crypto and their trades. As a result, transaction fees on a DEX are typically significantly lower than fees on a CEX.

In addition, would-be DEX attackers must compromise a resilient network of nodes that comprise the digital ledger rather than a single back-end processing location, which render DEXs highly secure.

DEXs have a lot to offer — but there are still plenty of reasons they lag behind CEX trading volume. Beginner users are on their own when it comes to navigating the complicated technicalities behind facilitating trades, and DEXs typically lack the sophisticated graphs and trading-tools that advanced traders are interested in using.

In addition, DEXs are usually slower than CEXs; and they typically don’t have many popular trading pairs so users must spend time and money turning their fiat into legacy crypto, such as Bitcoin and Ethereum, on a CEX before they can transfer funds to DEXs and trade other markets. In addition, low liquidity and trading volumes mean that a handful of trades can drastically alter the market value of a token. This makes it difficult to transact large amounts of crypto at once.

Pros and Cons of a Hybrid Exchange

Hybrids are a new kind of crypto exchange; although there might be a healthy group of hybrids to choose from years down the line, for now, Amplify will eventually offer crypto users the only genuinely feasible hybrid exchange on the market.

A hybrid exchange combines the accessibility and speed of a CEX with the security-enhancing decentralization of a DEX. Amplify has two exchange interfaces — Amplify Decentralized and Amplify Distributed. Combined, these interfaces provide Amplify traders with a simultaneously centralized and decentralized exchange — a hybrid exchange.

The concept of a hybrid exchange has stayed purely theoretical for a long time because there was no clear fabric for binding separate decentralized and centralized mechanisms into one exchange.

But at Amplify, we have that fabric, the Substratum network, which already uses a community of SubstratumNodes to provide decentralized, censorship-proof internet access. SubstratumNode operators who earn SUB routing internet requests can also opt to process Amplify transactions, adding new deals to the Amplify Bridgechain — in other words, merging the decentralized exchanges ledger and the distributed exchanges ledger into one.

We believe the pros of our hybrid exchange outweigh the cons. That is why we decided to circumvent the major obstacle to hybrid exchanges and created a way to sync decentralized actions and centralized actions via Substratum.

Because no one else has ever launched a hybrid exchange before, it’s difficult to predict with absolute certainty what obstacles we’ll run into as Amplify grows. Our host node network has to expand enough to efficiently process transactions and maintain reasonable block sizes as traffic on the exchange grows. Navigating the nebulous regulatory environment crypto faces both inside and outside the U.S. will also continue to be tricky for us.

We expect to encounter these obstacles — and likely others — as we launch Amplify; however, we see them as challenges to overcome, not insurmountable roadblocks. CEXs and DEXs both offer significant value to their users, but at a substantial cost. By building a hybrid exchange, Amplify is maximizing these exchange models’ advantages while minimizing their downsides.