Consider this: There will always be multiple blockchain networks. There won’t be one big winner someday. Different networks have different utilities, different applications, different sets of investors and users, and different values that rise and fall. Just like we need to transact between other countries and fiat currencies, there will always be a need to move value between blockchain networks. These transactions take place on an exchange.
Today, most of these types of transactions take place on CENTRALIZED exchanges. Coinbase, Binance, and Crypto.com are a few examples of popular exchanges. A centralized exchange is a bit like a traditional bank: it’s a company offering a service. In exchange for that service, they set the policies and fees that you must accept in order to use the service.
Pros & Cons of CEXes (Centralized Exchanges)
There are some advantages to centralized exchanges; today, at least, they are more beginner-friendly, and since the users are, in fact, “customers,” they will generally provide some level of customer service. Currently, centralized exchanges are the only good way to trade crypto for fiat (i.e. US dollars).
There are also disadvantages; since they are centralized, they are more susceptible to hacking, interference, and failure. Transaction fees charged by centralized exchanges can stack up quickly, and the policies about how they conduct business may not be in the best interest of the user.
Bring on the DEXes
Ultimately it’s no surprise that in an emerging ecosystem based on the value of decentralization, the thinkers and builders would also dream up a way to decentralize exchanges. A “DEX,” as it’s called, allows peer-to-peer transactions between cryptocurrencies with no intermediary. The terms of execution are built into smart contracts – basically software built on the blockchain. The advantages of a DEX include securing your assets against hacking risks, cheaper fees, access to new investments that are not available on centralized exchanges, and greater anonymity.
There are also some notable disadvantages, especially in these early days. DEXes are not known to be beginner-friendly. The onus is really on the user to understand how a particular DEX works. If something goes awry due to user error or otherwise, no one on the customer service line will bail you out. Finally, DEXes do not address the need to transfer value out of crypto and into fiat money. In today’s world, that is still a critical link.