It’s no secret that vast majority of the cryptocurrency world has been in favor of decentralization over centralization. In fact, that’s one of the foundational pillars of the nascent asset class. But are decentralized exchanges really better than centralized ones?
Ethereum co-founder Vitalik Buterin, in an interview with TechCrunch, recently made the bold assertion that centralized exchanges go “burn in hell” — as he believes the primary purpose of centralized exchanges is to provide a bridge between the worlds of cryptocurrencies and fiat currencies. Centralized exchange are, of course, currently the norm — but Buterin hopes to see that fact change in the near future.
On the other side of the spectrum is Binance CEO Changpeng Zhao, who disagrees with Buterin. Recently, Zhao answered Buterin’s complaints on Twitter while suggesting that Vitalik should be more appreciative of the fact that centralized exchanges are part of an ecosystem, rather than independent parties.
According to Zhao’s tweet, fiat had and still likely still has an important role in the development of decentralized digital currencies and tokens. If not for centralized exchanges and fiat currencies, liquidity would be minimized and the industry would stagnate.
Zhao also noted that decentralization is inherently safer in name alone. In the cases of Ethereum Classic and Ethreum DAO, the decentralized organization more-or-less failed to protect itself. Thus, is freedom not more important than decentralization?
Nevertheless, decentralization has become a borderline-mainstream fad — but many individuals are not truly aware of how it works and whether or not it actually equates to complete freedom. So, the question is: Are decentralized exchanges better?
The End Goal
First and foremost, let’s get one thing straight: most cryptocurrency exchanges cannot compete with more traditional equity trading platforms in terms of speed of execution, sophistication of order management, quality of API, efficacy of risk control, and other factors.
In the case of decentralized platforms, specifically, they provide direct exchange between transacting participants, but do not bring in profits — hence, their growth potential is significantly hamstrung. Furthermore, their trade mechanisms are stereotypically slow and they fail to provide many critical market tools. Centralized exchanges, by comparison, provide a more significant number of market tools and a more stable user experience.
Though it might seem like a contradiction, those who value safety are currently better off choosing centralized exchanges.
Decentralized blockchain solutions, meanwhile, are costly and difficult to develop — since the blockchain doesn’t provide processing power for free. Decentralized exchanges must charge fees as they have no other means of generating revenue, while some centralized exchanges offer fee-less or low-fee trading.
Compounding issues for decentralized exchanges is the fact that the speed of trading is slower — an issue which has a greater impact on high-frequency traders.
A Hybrid Solution
Of course, both centralized and decentralized exchanges have their pros and cons. The choice ultimately depends on the needs of the individual trader.
However, that choice is starting to be made easier by the emergence of hybrid, semi-decentralized exchanges that prioritize high performance over full decentralization — which helps decrease development and operating costs.
Rayan Goutay, an expert in strategy in this field at the intersection of technology, business and regulations, who has recently been appointed General Counsel at GateX – an upcoming hybrid semi-decentralized exchange, explains:
Hybrid semi-decentralized exchanges take best from both centralized and decentralized solutions and aim to solve their typical problems. Hybrid exchanges are working to make their solutions transparent and trustful but don’t follow the hype trends blindly. For instance, the blockchain is an ultimately useful technology for some cases, but it is enormously expensive to use, especially when dealing with large chunks of data. So it’s wise to choose the blockchain when it is crucial and opt for cheaper centralized solutions when possible.
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What do you think about the debate between centralized and decentralized exchanges? Do you think hybrid exchanges like GateX can resolve the issues mentioned? Let us know in the comments below!
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