What Sets DEXs Apart From CEXs? A Deep Dive From Those Who Know Best: Their Creators and Traders

The reason there are flaws with centralized exchanges is that they do all their transactions in a database backend, making transactions faster and enabling them to have more liquidity. But they are prone to hacks, as users’ funds are held by a middleman.

Trading on DEXs, on the other hand, is executed through smart contracts on a blockchain, making it harder for hackers to steal huge sums of cryptocurrency. 

DEXs remove a single vulnerability and allow more autonomy with features such as self-custodial trading, but making interfaces secure and accessible while not compromising profitability is a key balancing act for many DEXs. 

For this explainer, three DEXs have come together to break down the key features, setting them apart and showing how they are the best alternative to the future of finance:

• Tokenlon, a fast and secure decentralized exchange powered by 0x protocol using Request For Quote (RFQ) architecture to bring decentralized liquidity to the masses;
• Matcha, a consumer-facing DEX built by 0x Protocol, known as the "Robinhood of DEX," and;
• Kyber Network, an on-chain liquidity protocol that can be integrated into any application to enable the exchange of tokens without the need for an intermediary. It powers Kyber Swap, a fast, simple, and secure token swap platform.

The key features we will be breaking down include:

• Security: atomicity of swaps; ability to control your own security versus relying on an exchange's ability to prevent hacks.
• Cost effectiveness: no deposit/withdrawal needed saves on-chain fees.
• Convenience: requests for quotation enables WYSIWYG/ZERO slippage; easy to swap right inside your wallet and no account registration required.
• Token usage: permissionless token listing; aggregation of different DEXs.

DEX’s on How They Envisage Decentralized Trading in the Future 

Representatives from each DEX dive into the trading features that make DEX’s top competition for the future and how decentralized trading can help achieve DeFi’s mission.

Lucas Huang, head of growth at Tokenlon:

The self-custody and the ease of use will be the core competitiveness for the DEX. With decentralized trading, users manage their private keys without fear of centralized exchange hacks or counter-party risk. As more and more decentralized finance use cases emerge, more users will start to keep their funds in their wallets. DEXs allows traders to trade right from the wallet, without the need for deposit or withdrawal. Although centralized exchanges have their edge, they cannot compete with DEXs on these two fronts.Decentralized liquidity is the key to the success of decentralized finance. In traditional finance, liquidity plays a vital role, and it will be the same in decentralized finance. Financial use cases, from payment to insurance, require liquidity. DeFi with smart contracts as the core requires decentralized liquidity brought by DEX.

Clay Robbins, head of growth at 0x Labs, developer of Matcha.xyz:

The 0x Labs and Matcha team believes that decentralized trading is how all markets and liquidity will be accessed in the future. As the mobility of user funds becomes more frictionless, it's inevitable that open, decentralized interfaces are where traders will coalesce. The three biggest features that we believe set DEXs apart are 1. global accessibility 2. non-custodial trading 3. access to any tokenized market.An exchange is a core function that underpins all financial markets — whether they're centralized or not. By offering a safer, lower cost and frictionless way to exchange any form of value, we believe that decentralized trading will help build the foundation of the future DeFi alongside other elements like credit.

Shane Hong, head of marketing at KyberSwap:

Decentralized trading, being non-custodial, immutable and censorship-resistant, allows users to truly own their assets (‘be your own bank’), while transferring value in a secure and transparent manner, all of which uphold the main ethos of decentralized finance (DeFi). Moreover, DeFi and smart contracts cannot function without seamless, decentralized and on-chain transactions. This shapes Kyber Network’s core purpose, to deliver a sustainable liquidity infrastructure and provide seamless on-chain liquidity for thousands of DeFi platforms including imToken. Key trading features in the future would need to account for ease of onboarding for new entrants into the DeFi space. This includes better UI/UX, affordable fiat on-ramps, more robust security mechanisms, easier private key and seed phrase management, and optimal on-chain liquidity sourcing from protocols such as Kyber Network.

Traders Break Down Their Most Important Features 

More and more traders are choosing DEX’s over centralized exchanges; there are, however, debates on the risks which are more commonly associated with DEXs.

We asked traders their thoughts on liquidity vs. security, and whether they believe you can have both.

An anonymous trader, called Trader 1 for the purpose of this piece:

Safety is not the most critical factor for me. I have used a centralized exchange for several years, and I have not encountered an asset loss event. However, the convenience of decentralized exchanges is a significant advantage. Because I participated in DeFi mining, my tokens are stored in my wallet. When I want to trade, I can trade directly in the wallet without transferring to centralized exchanges.

An anonymous trader, called Trader 2 for the purpose of this piece:

I have held cryptocurrencies for a long time and have experienced the Mt.Gox hack, so I am more cautious about security. I'm a HODLer who rarely trades, so I have always had the habit of keeping tokens in my wallet. This year, DEX has grown rapidly, and its liquidity has also improved a lot. At present, as long as the liquidity is not bad on a DEX, I will give priority to using a DEX.

A market maker working on Tokenlon:

For some trading pairs, the liquidity on a DEX is already comparable to that of centralized exchanges. We are market making on both DEXs and CEXs, so we have witnessed the incredible improvement in DEX's liquidity this year. We believe the trend will continue, and traders who trade on DEX will no longer need to make a sacrifice in liquidity soon.

Security Concerns in the Wake of Hacks and Scandals Within Centralized Finance 

Experts from DEXs talk on the features and security measures that need to be put in place to prevent hacks from happening in the crypto space.

Lucas Huang, head of growth at Tokenlon:

With decentralized trading, users trade directly in their wallet without having to deposit first. Therefore, there is no custodial risk of centralized exchanges. However, it is worth mentioning that decentralized exchanges, like other DeFi products, can have technical/code risks. Before using decentralized financial products, users should try their best to use those that have been audited by a reputable security firm, and have been battle-tested in the market for a while.

Clay Robbins, head of growth at 0x Labs, developer of Matcha.xyz:

As a protocol and product that enables users and institutions to exchange a meaningful amount of value, we're always concerned with security. Fortunately, due to the non-custodial nature of DEX's we aren't exposed to the same risk vectors that plague our custodial counterparts. That said, things like smart contract security are still a very real threat to user funds and the space will need to establish a set of best practices in order to ensure robust audits and safe deployment of smart contracts that can alter user balances.

Shane Hong, head of marketing at KyberSwap:

There have been many security breaches in centralized exchanges over the past few years (e.g. Mt Gox in 2014) with millions of dollars worth of crypto assets stolen. Such incidents are stark reminders that users do not have full control over the crypto assets residing in custodial services and face substantial custodial risk. DEXs, being non-custodial, allow users to truly own their assets and this eliminates custodial risk. However, DEXs do come with smart contract and operational security risks, so it is absolutely essential for all DApps and DEXs such as imToken and KyberSwap, as well as protocols such as Kyber Network to undergo smart contract audits as well. To further safeguard users, insurance can also be purchased and it is encouraging to see an increase in projects such as Nexus Mutual and Opyn that focus on this use case. At Kyber, security is of utmost priority. The smart contracts for our liquidity protocol and KyberDAO (with ~US$50M staked) have undergone multiple audits. Moreover, we regularly educate users on the benefits of decentralized technologies over centralized ones, and sharing the best practices for the management of their digital assets.