“DEX Sells!” An exploration of centralised vs. decentralised crypto exchanges
The last few months have seen a big buzz around what us geeks call a Decentralised Exchange (DEX) model. In fact it’s one of the first things we get asked: “Are you decentralised?”
It’s the very most frequent of our Frequently Asked Questions. “Well, you must be”… they urge breathlessly… “Surely? It’s the future”.
So allow me to answer that question in depth (SPOILER: we’re not). But first, some definitions. What exactly is a DEX and what’s the opposite, a Centralised Exchange (CEX)?
The Decentralised Exchange (DEX) Model
A DEX is an exchange that allows two parties to trade their digital assets directly with each other. Those assets don’t ever change hands with a central party (the exchange). The thinking goes that this is a more secure, more community-bound way of doing business, one that is more in the original spirit of the bitcoin and blockchain revolution.
The Centralised Exchange (CEX model)
A CEX on the other hand is an exchange that allows users to deposit their funds in one currency, then the exchange holds those funds and issues an “IOU” that can be freely traded on the platform. The user can buy and sell by trading with a list of “market makers and takers” that the exchange curates and matches from its actively trading users.
When a user asks to withdraw funds from the exchange, these are converted back into the fiat (“traditional”) currency or cryptocurrency that they represent and sent to their owner.
The Elepig Model
As we’ve already alluded to, Elepig runs on a centralised model. But why on earth would we choose to do that if “decentralised” is the latest buzzword and seen by many to be the future?
Well, for exactly that reason. It’s in the future, and right now we live in the present! In a recent video interview, the CEO of Binance Changpeng Zhao — who has long stated an aspiration to move to a DEX model — stated that the technology isn’t here yet to support DEX, and won’t be for the next few years. What exactly did he mean by this? Let’s tackle the issues one-by-one.
Volume
In a DEX the trading engine uses orchestration and automation (O&A) to send assets directly from one user to another. This is great in theory, but in practice it is simply not scalable. There are very concrete ceilings that will be hit in terms of concurrent trades. One day the tech may be good enough for this, but that day is not today.
Speed
Crypto is a lightening-fast, often volatile, 24/7 market. Microseconds matter. For many of the same reasons listed above, the architecture required to facilitate direct peer-to-peer (DEX) transactions just isn’t as quick as CEX can be.
Liquidity
This term refers to the ability to buy or sell an asset at the time that you want to (and preferably at the best price). This is entirely dependent on the depth of the order book (the number of people willing to match the proposed trade) which is often shallow in a DEX.
On the other hand centralised exchanges benefit from a wider user base, and also have the ability to hold their own asset reserves which can be sold to users. Thirdly they have the ability to feed in liquidity from third-party providers which is virtually impossible on an individual peer-to-peer basis.
User Experience (UX)
A centralised exchange can have a much simpler user interface (UI) than a decentralised one, and can present vastly richer functionality. All of this means that the UX can be a more pleasant journey in a centralised model. The interface can be more intuitive and the user can do more things and in an easier-to-understand way.
Regulation
A decentralised model means that users can remain anonymous much more easily than with a centralised exchange. At Elepig we respect the ethos of anonymity core to the world of blockchain, but we are also pragmatic and realise that to survive in today’s world we must implement robust Know Your Customer (KYC) and Anti-Money Laundering (AML) practices. One of the main features requested by our users is fiat (traditional) currency deposit and withdrawal. To offer that, we need to partner with more traditional financial institutions. Something which is infinitely more manageable in the CEX world.
Summary
In summary, The Elepig Exchange has implemented a centralised model for a variety of well considered reasons. When the required technology improves we will reconsider the business, regulatory and UX case for implementing DEX, but until this day comes we are proud to wave the flag for CEX!
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