Why Decentralized Exchanges Matter
On 12 August, blockchain news outlet CoinTelegraph reported that the decentralized exchange Uniswap had officially met the one-billion-dollar mark in terms of fees collected by liquidity providers. To the uninitiated, this piece of news might not sound like much, but at the end of the day, it reflects an exciting trend — growing adoption for DeFi and for cryptocurrency in general.
In today's blog post, we'd like to unpack what Uniswap's milestone means for crypto. In addition, we will attempt to clear the air a bit about what exactly a decentralized exchange is and why they are important.
In today's blog post, we'd like to unpack what Uniswap's milestone means for crypto. In addition, we will attempt to clear the air a bit about what exactly a decentralized exchange is and why they are important.
What is a decentralized exchange?
There exist two mains kinds of cryptocurrency exchanges: centralized and decentralized. Each serves an important role in the world of digital assets.
Centralized exchanges (often called "CEXs") are businesses that provide regulated crypto-financial services. This includes facilitating the purchase and sale of cryptocurrency in exchange for fiat. CEXs must apply for licences and are held responsible by governments to keep your coins and tokens safe.
Decentralized exchanges ("DEXs"), on the other hand, are neither businesses nor are they regulated. Governed by decentralized organizations of token holders, these are online, “on-chain” services that facilitate easier P2P cryptocurrency trading. While it is not possible to withdraw fiat currency using this kind of exchange, DEXs can be quite useful for finding liquidity for small-cap coins and tokens.
There exist two mains kinds of cryptocurrency exchanges: centralized and decentralized. Each serves an important role in the world of digital assets.
Centralized exchanges (often called "CEXs") are businesses that provide regulated crypto-financial services. This includes facilitating the purchase and sale of cryptocurrency in exchange for fiat. CEXs must apply for licences and are held responsible by governments to keep your coins and tokens safe.
Decentralized exchanges ("DEXs"), on the other hand, are neither businesses nor are they regulated. Governed by decentralized organizations of token holders, these are online, “on-chain” services that facilitate easier P2P cryptocurrency trading. While it is not possible to withdraw fiat currency using this kind of exchange, DEXs can be quite useful for finding liquidity for small-cap coins and tokens.
Advantages and Disadvantages of CEXs
Pros:
Cons:
- Fast transactions
- Liquidity for large trades
- Customer service
Cons:
- Rare support for small market cap tokens
- Not on-chain (possible security concerns)
Advantages and Disadvantages of DEXs
Pros:
- Security
- Privacy
- Sovereignty
- Liquidity for rare tokens
- Slow transaction speeds
- Low liquidity (particularly for large trades)
- Cannot deal with fiat
- No customer service
To CEX or to DEX, that is the question
Decentralized and centralized exchanges ultimately serve different purposes and fulfil divergent use cases. Neither is objectively better than the other, and most crypto users tend to spread their trading out among a range of exchanges.
Decentralized and centralized exchanges ultimately serve different purposes and fulfil divergent use cases. Neither is objectively better than the other, and most crypto users tend to spread their trading out among a range of exchanges.
CEX Use-cases
- Buying crypto with fiat:
CEXs are the easiest and most secure way for most users to get started with crypto.
- Selling crypto for fiat:
Most exchanges offer a number of ways to withdraw funds.
- Executing large trades:
Only CEXs can provide liquidity for large cryptocurrency purchases and sales. - Discretion:
Trades are executed off-chain, which means they are not publicly visible.
DEX Use-Cases
- Trading rare tokens:
DEXs are really the best way to find liquidity for small-cap coins and tokens.
- Getting access to Dapps:
Decentralized applications often require tokens that can most easily be acquired on a DEX. - Keeping your head low:
If you want to get “off the grid,” there's really no other way around it — you're going to have to use a decentralized exchange.
If you're just starting out with crypto, we recommend opening an account with a centralized exchange as your first step. Later, when you're ready to get started with more advanced portfolio diversification strategies and DeFi, you can move onto using a DEX.
The Billion-Dollar DEX
The Uniswap news is significant, in our view, for three reasons: First, it reflects a shift among investors towards more varied portfolio diversification. Second, it implies growing interest in DeFi. Third, it more generally helps to prove the viability of decentralized autonomous organizations (DAOs) as a concept.
As we've discussed in another post, individual and institutional investors are increasingly investing in alternative cryptocurrencies, or Altcoins. Beyond investing, people have begun to actively use cryptocurrency for its original use-case as a transactional instrument. Indeed, according to CoinMarketCap, stablecoins dominate digital asset markets in terms of daily trading volume.
Decentralized exchanges are an essential part of the growing DeFi ecosystem, and their growth in popularity and profitability reflects increasing interest in these new financial instruments. Really, this trend is unsurprising given the plethora of passive income generation opportunities and the possibility of double-digit percent gains.
In the end, the very fact that so much value is being transferred through DEXs proves that there are people who are ready to trust decentralized organizations with their money. Going into the future, it will be interesting to observe what kinds of exciting innovations will come along to serve this market.
The Billion-Dollar DEX
The Uniswap news is significant, in our view, for three reasons: First, it reflects a shift among investors towards more varied portfolio diversification. Second, it implies growing interest in DeFi. Third, it more generally helps to prove the viability of decentralized autonomous organizations (DAOs) as a concept.
As we've discussed in another post, individual and institutional investors are increasingly investing in alternative cryptocurrencies, or Altcoins. Beyond investing, people have begun to actively use cryptocurrency for its original use-case as a transactional instrument. Indeed, according to CoinMarketCap, stablecoins dominate digital asset markets in terms of daily trading volume.
Decentralized exchanges are an essential part of the growing DeFi ecosystem, and their growth in popularity and profitability reflects increasing interest in these new financial instruments. Really, this trend is unsurprising given the plethora of passive income generation opportunities and the possibility of double-digit percent gains.
In the end, the very fact that so much value is being transferred through DEXs proves that there are people who are ready to trust decentralized organizations with their money. Going into the future, it will be interesting to observe what kinds of exciting innovations will come along to serve this market.
Explore DeFi
The opportunities that are available to both retail and institutional investors in the world of decentralised finance are many, but not everyone knows where to start. At AlterCap, we specialise in helping companies transform business processes. Contact us to learn more.
The opportunities that are available to both retail and institutional investors in the world of decentralised finance are many, but not everyone knows where to start. At AlterCap, we specialise in helping companies transform business processes. Contact us to learn more.