Dex crypto - decentralized exchange: uniswap, GMX

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Due to past events and failures of crypto exchanges, where infamous exchanges have failed to secure the assets of their customers, there has been increased enthusiasm for decentralized financial solutions such as DEXs and DeFi. The growth of the decentralized exchange Uniswap has sparked a debate among traders about the pros and cons of decentralized exchanges compared to centralized exchanges (CEX).

According to Forbes research, there are currently around 600 active crypto exchanges in the world. These exchanges can be divided into centralized (CEX) and decentralized (DEX). The first type includes well-known exchange Binance, which quickly became the largest cryptocurrency exchange in the world. When it comes to decentralized exchanges, the most well-known are Uniswap and Pancakeswap, which are standalone solutions for trading cryptocurrencies.

Photo: DEX vs CEX: Uniswap vs Binance.

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Many blockchain enthusiasts and larger investors predict that the customer base of decentralized exchanges will skyrocket in the next few years. Several well-known crypto exchanges are also developing decentralized versions of their blockchain exchange platforms to find differences in various transactions. So, let’s look at why?

Exchanges are attractive targets for hackers because they have huge amounts of cryptocurrencies. It is often much more profitable to hack into a crypto exchange than a bank vault. It is like a pot of gold at the end of a rainbow, only the exchange’s security measures need to be tricked instead of a leprechaun. That is why exchanges are extremely prone to very sophisticated cyber attacks.

In addition to hacking, problems can arise within the exchange. Any exchange can poorly manage and lose part or all of its reserves. You may have heard of the recent QuadrigaCX controversy, whose owner died with all the private keys, allegedly losing access to $190 million worth of assets belonging to users. The infamous Mt. Gox exchange, whose founders were not attentive to constant hacks that lasted for over two years, also lost 650,000 Bitcoins.

Therefore, centralized exchanges like Binance, Kraken, Coinbase and others are just intermediaries responsible for tasks of supervision and management of all transactions between final users and blockchain projects that publish their coins on these exchanges. Centralized exchanges work on a very basic principle; a new exchange user must follow the usual method of buying bitcoins, where they must register and provide their bank details to the exchange. Then the exchange will verify the user’s identity and allow them to buy bitcoins using their bank account. The exchange will then charge a fee for the service.

In decentralized exchanges, smart contracts using algorithmic market makers (AMM) are used to perform operations. DEX exchanges use liquidity pools for transactions, where investors deposit their assets in exchange for rewards. This is actually a very sophisticated and advanced method of exchanging cryptocurrencies. DEX users have complete control over their finances! Of course, there is another side to the coin, where all assets stored on a wallet will be lost if the data (private key) necessary for its activation is lost. Many users have thus lost their entire fortune. A private key is made up of a series of twelve randomly generated words that are unique to the activation of each wallet. It looks like this:

This is how a "private key" looks on a Metamask wallet ➔

Decentralized exchanges use liquidity pools for transactions, where investors deposit their assets in exchange for rewards. In fact, this is a top-of-the-line method of exchanging cryptocurrencies, and in this sense, such solutions are often equipped with an open-source code and can be used in standalone projects.

DEX users have complete control over their finances. In addition, a wallet stored in a wallet will be lost if the data (private key) necessary for its restoration is lost. Software admins who store such keys can be a hidden weak point for DEXs because they are long and difficult to recall.

Smart contracts are used to operate DEXs (such as BinanceDEX, Nash Exchange, etc.) that use certain algorithms to control asset prices.

At the beginning, centralized exchanges, like Binance and Coinbase, were the only option for trading cryptocurrencies, so crypto traders had no choice but to choose the most convenient exchange. Today, however, we also know other types of exchanges, where their creators do not have control over the users’ funds, these are decentralized exchanges.

Here we can mention Uniswap, Pancakeswap, DYDX and the exchange GMX, which has gained popularity in the last year and for the first time in history overtaken its rival Uniswap in the amount of daily collected commissions. (seen in the picture)

Photo: The GMX exchange has exceeded the daily commissions of Uniswap.

Their success, satisfied customers, and rapid progress can also be seen in their resistance to the bear market, where the price has increased by more than 20% in one year, while Uniswap suffered more than a 50% drop in price.

Additionally, the success of the GMX decentralized exchange probably also stems from the fact that holders of GMX coins receive 30% of all trading fees, while holders of UNI coins do not receive any share of trading fees.

So, if we review the advantages and disadvantages of centralized and decentralized exchanges:

Centralized exchange

ADVATAGES	DISADVANTAGES
Large trading volume (liquidity)	Strict regulations and no privacy (KYC)
Convenient exchange into fiat currencies and vice versa	Lack of control over the user account
More capabilities (leveraging, margin trading)	We do not have access to private wallet keys.
User friendly	Frequent hacker attacks.

Decentralized exchangee

ADVANTAGES	DISADVANTAGES
Complete user privacy	Frequently limited functionality
Increased security	Low trading volume
Support for the use of applications and NFTs.	Possible problems with transaction speed.

Many experts believe that for the survival of decentralized exchanges, it is necessary to improve the experience of depositing fiat money, which requires a connection with traditional banking institutions; allowing the users to choose freely between decentralized finance (DeFi) and centralized finance (CeFi), such as creating a DeFi and CeFi wallet in one application. Also, this wallet must support multiple blockchains and thus provide compatibility, so that users do not have to use multiple platforms for different needs.

Regardless of all the security measures taken by exchanges, it would be foolish to blindly trust them, as all data shows that there is no safe solution that can truly guarantee the security of their customers’ funds. As the history of exchanges shows, no platform is immune to breaches and problems always arise when you least expect it. Therefore, it is better to take matters into your own hands and set up a private digital wallet. As the well-known crypto analyst and security entrepreneur Andreas Antonopoulos says:

Image: As noted crypto analyst and security entrepreneur Andreas Antonopoulos says:
“Your keys, your Bitcoin. Not your keys, not your Bitcoin.”

Although the difference between centralized and decentralized exchanges is quite obvious, there are questions on both sides of the debate. DEXs are still inaccessible to the average user, despite the efforts of companies like GMX to reduce access barriers. On the other hand, centralized exchanges are still vulnerable to the threat of breaches and have a bad reputation.

Depending on the direction of regulatory changes, regulation will continue to play a crucial role in the battle for market dominance. Business-friendly legislation could further institutionalize centralized exchanges, while excessive regulation or a complete ban on certain digital assets could push users further towards decentralized exchanges.

Based on the comparison of the two types of exchanges, you will have to decide for yourself which method suits you best and what level of risk of loss you are willing to accept. Above all, who do you trust the most, institutions or yourself?