The emergence of centralised exchanges (CEX) such as Binance and Coinbase provided a convenient entry point for most crypto users. These platforms offered an easy way to convert fiat to crypto, access a wide range of tokens, and refined user experiences. However, the centralised nature of CEX platforms poses risks and limitations. Users must trust the platform’s corporate entity to handle their funds and comply with KYC requirements.
In response to these concerns, decentralised exchanges (DEX) were introduced to align with the decentralised nature of cryptocurrencies. DEX platforms eliminate the need for KYC and allow users to maintain control over their assets. Governed by the community, DEX platforms operate in a fully automated manner.
DEX platforms bring additional benefits, including access to decentralised finance (DeFi) opportunities such as staking, lending, and yield farming. However, DEXs present their own set of challenges. They are often less user-friendly, requiring users to possess a significant level of knowledge to navigate their DeFi features.
One of the main drawbacks of DEXs is the lack of deep liquidity compared to CEXs. As there is no centralised entity facilitating trades, users rely on automated market makers, leading to significant slippage during transactions. This results in users paying higher prices than expected to acquire desired assets. Additionally, DEXs do not support crypto-to-fiat conversions due to their non-compliance with KYC regulations. Without a corporate entity to process KYC, DEXs cannot offer fiat services.
Fortunately, innovative solutions exist to address these downsides. Some projects aim to bridge the gap between centralised and decentralised exchanges by introducing hybrid models. These models combine the benefits of user-friendly interfaces and deep liquidity from CEXs with the decentralised nature and asset control of DEXs. By implementing advanced technologies and protocols, these hybrid exchanges strive to offer a seamless user experience while maintaining the principles of decentralisation.
Moreover, advancements in blockchain technology are enabling the development of layer-2 solutions and interoperability protocols. These solutions aim to enhance scalability, liquidity, and cross-chain compatibility for DEX platforms. By addressing the liquidity issue and expanding the range of supported assets, these technologies have the potential to mitigate slippage and improve overall trading experiences on DEXs.
As the crypto ecosystem continues to evolve, it is essential to explore innovative solutions that strike a balance between user convenience, asset control, and compliance. The ongoing development of hybrid models, layer-2 solutions, and interoperability protocols holds promise for overcoming the limitations of both centralised and decentralised exchanges, ultimately enhancing the trading experience for crypto users.
