The introduction of centralised exchanges (CEXs) like Binance and Coinbase played a significant role in onboarding the majority of crypto users. CEX platforms provided a user-friendly experience, access to a wide range of cryptocurrencies, and facilitated the conversion of fiat to crypto. However, the centralised nature of CEXs poses certain risks and limitations that decentralised exchanges (DEXs) aim to address.
CEX platforms, being centralised, require users to trust the platform to hold and withdraw their funds. Additionally, compliance procedures, such as Know Your Customer (KYC) verification, are mandatory for CEXs. On the other hand, DEXs emerged as a decentralised alternative, allowing users to have control over their assets and eliminating the need for KYC. DEXs operate through automated protocols governed by the community of users.
While DEXs offer benefits such as access to decentralised finance (DeFi) and various earning opportunities, they come with their own set of challenges. DEXs are often less user-friendly, and utilising DeFi features requires a higher level of knowledge. Moreover, the absence of centralised entities conducting trades results in lower liquidity, leading to slippage and higher costs for users during transactions. Additionally, DEXs cannot support crypto to fiat conversions due to the lack of compliance processes, limiting their services to crypto-only transactions.
To overcome these downsides and strike a balance between centralised and decentralised exchanges, innovative solutions are emerging. Some projects aim to combine the best of both worlds by introducing hybrid exchanges that offer the user-friendly experience of CEXs while leveraging the advantages of DEXs. DEXs platforms utilise layer-two scaling solutions, such as sidechains or off-chain order books, to improve scalability and liquidity without compromising decentralisation. By integrating compliance mechanisms, they also enable crypto to fiat conversions, providing a more comprehensive service to users.
The development of innovative solutions seeks to address the limitations of both CEXs and DEXs, offering users a wider range of options and a more tailored trading experience. As the crypto industry continues to evolve, the evolution of exchange models will play a crucial role in meeting the diverse needs of crypto enthusiasts while ensuring security, accessibility, and financial sovereignty.
