How to get over your Ex

Pick a paper, note down their good things, then the not-so-good things and well, move on.

One entails a deeper commitment. The other has lesser stakes. One involves more members of the family. The other never flashes ‘complicated’ in the relationship status. One takes time to marinate. The other one is easy to carry-on. One takes intestinal fortitude and is not so easy to replace. The other is faster and simpler but also easy to swap. One needs maturity. The other accommodates novices.

Caught you? You almost thought we were talking about marriage vs. live-in. No? You were actually thinking of slow-cooked rice in a Moroccan Tagine vs. a ready-to-eat pack tossed in a microwave? Well, same difference. We are trying to compare DEX (Decentralised Exchange) vs. CEX (Centralised Exchange). But, whatever.

Pound for Pound

Like any old-school thing vs. a new-fangled alternative, a DEX beats a CEX hands-down on safety, trust, stability and depth. But do people need that over speed and ease?

Siddharth Sogani, Founder, CEO, CREBACO reckons DEXs as fantastic because they complement the very foundation of Bitcoin’s model: decentralisation.  “In many CEXs, you may not know what is being done with the money once the amount is in the exchange. It is not your money if you do not have your private key for it. Plus, security is another issue. A recent case of a CEX – where an owner died thus leaving all the private keys obscure forever – iterates that concern. I guess the future of exchanges in this space is DEX.” Yes, Quadriga CX, a long running Canadian Exchange, was indeed a disaster (millions of dollars pending in outstanding claims) with a new twist.

Neeraj Khandelwal, founder of CoinDCX echoes that argument of decentralisation and picks up the hood to explain the innards better. “Blockchain is a database that is decentralised. Building an exchange on a centralised database is easy. If few people want to exchange assets, a platform can show it in a single database. In a CEX, the transactions remain on the company database and do not go to the blockchain, so it entails just a few microseconds. But on a decentralised database the same transaction is replicated across the chain. So it is difficult to build a DEX but it turns out to be more secure than a CEX.”

He brings his lens to other important areas next. Liquidity is built in a CEX. “But in a DEX, the user actually retains the ownership of the fund which cannot work in a CEX where a user deposits the asset to a hot wallet thereby, trusting this exchange for security of funds. This makes a CEX a lucrative target for hackers as well because a single hack can give access across a lot of funds. In a DEX, a hacker has to hack all the accounts separately.” 

DEXs do cement the fundamental idea of a blockchain – no middlemen and full democratisation. According to a recent TokenInsight report, DEXs are strong on allowing user control, deal matching and asset liquidation even as CEXs wobble on areas like opaque trading rules and fund storage.

CEXs – Not Tapping Out

That said, DEXs, specially the current ones, are really complicated to use – whether it is through a text key or via a hardware wallet. “If the user is a complete novice to this field, s/he can be hacked or become a victim of phishing. So there needs to be more simplicity, awareness and education to the users that DEXs need to spruce up on.” Sogani weighs in.

Interestingly, in a Binance blog (a very popular exchange) CEO Zhao C opines that decentralisaion is not the ultimate goal but a means to increase freedom and security without sacrificing ease-of-use. “The majority of the population out there today holding crypto on a trusted centralised custodian service is probably safer and easier than holding cryptocurrency themselves.” He contends that there is a decreased level of freedom, but if you choose wisely, some options will allow you to retain a high degree of freedom. “With more tools being actively developed, I do see more people will be able to hold their own funds (private keys) over time, in a secure and easy-to-use fashion.”

Khandelwal also notes the fungibility aspect as a point of comparison – assessing it to be better in case of a CEX than in a DEX. “When two categories of currencies have different networks, they will not talk to each other and that is a prerequisite to a good exchange.”

Speed and convenience are definitely areas where CEXs score better than DEXs, he further explains. “This is because exchange of an asset is not in blockchain unlike a DEX where every transaction appears in a blockchain and that slows down the overall process.”  However, newer networks might solve that gap and give a faster speed to DEX even if not exactly as fast as a CEX, he adds.

It is not hard to guess then why CEXs still dominate the global industry trade volumes as indicated in the 2018 Cryptocurrency Exchange Annual Report from TokenInsight. DEXs trading volume were around 0.83 per cent, CEX’s stood at 99.17 per cent. Also, CEXs constituted 81 per cent of the global exchange ecosystem. DEXs were also observed to be more sensitive than CEXs to downward trends in the secondary market. In terms of numbers, DEXs were significantly better with development of the general platform ecosystem in 2018. But they still need to figure out slow trading rates, high trading fees, and insufficient liquidity issues. Incidentally, these are areas where CEX get a leg up.

New Rings Ahead

Remarkably enough a lot of players are warming up to the gaps that exchange space has been struggling with. Whether it is OKB working on its own blockchain OKChain for its first DEX or the work on a DEX underway at XRPL Labs or Binance all set for its DEX with a public test phase in progress or the rise of decentralised trading protocols (Bancor, Loopring and Kyber network); looks like the market is innovating fast on the exchange front.

Khandelwal avers to visible evolution in the market as well. He feels that security and liquidity have started to get balanced in the upcoming offerings that are emerging. He cites examples like Binance while emphasizing the need for mixing liquidity and speed that is being recognized by some exchanges now.

It would really be nice to have a DEX that marries (oops, we used the word after all) the strength of the old world to the speed needs and user-experience delight of the post-modern era.

No one really wants a fling where everything is superficial. No one can afford the heavy-duty asterisks of a marriage either. Until we figure out a better equation, How about friends with benefits?