The widespread adoption of cryptocurrencies has led to the emergence of both centralised and decentralised exchanges. Centralised exchanges (CEX) such as Binance and Coinbase have provided a user-friendly entry point into the crypto space, offering convenience and access to a wide range of tokens. However, their centralised nature raises concerns regarding trust and compliance.
When users deposit funds on a CEX, they must trust that the platform will allow them to withdraw their funds when needed. Additionally, these platforms require customers to undergo Know Your Customer (KYC) procedures to comply with regulations. The centralised control and compliance processes of CEX platforms have sparked the need for alternative solutions.
Decentralised exchanges (DEX) have emerged as a response to these issues, aligning with the decentralised nature of cryptocurrencies. DEX platforms eliminate the need for KYC and enable users to maintain control of their assets. Governed by the community, DEX platforms provide access to decentralised finance (DeFi) opportunities, allowing users to earn passive income through activities like staking, lending, and yield farming.
However, DEX platforms also come with their own set of challenges. They are typically less user-friendly and require users to have a deeper understanding of DeFi concepts. The most significant challenge is the lack of liquidity compared to CEX platforms. Instead of relying on a centralised entity to facilitate trades, DEX platforms employ automated market makers, resulting in significant slippage during transactions. Users may end up paying higher prices than expected to acquire the desired assets.
Moreover, DEX platforms do not support crypto-to-fiat conversions due to their non-compliance with KYC regulations. As there is no corporate entity involved, they cannot process KYC procedures and, consequently, cannot offer fiat services.
Fortunately, innovative solutions are emerging to address the downsides of both centralised and decentralised exchanges. Hybrid exchanges are combining the best of both worlds, offering the user-friendly experience and liquidity of CEX platforms while incorporating the privacy and control of DEX platforms. These hybrid exchanges aim to provide a seamless trading experience, enhanced liquidity, and compliance with regulations.
As the crypto industry evolves, it is expected that further innovations will bridge the gaps between centralised and decentralised exchanges, offering users the benefits of both worlds without compromising on security, liquidity, or user experience.