The key advantages of centralized exchanges
We’ve already covered the issues with centralized exchanges in our last post. We’ve seen that they are vulnerable to hackers, tend to manipulate the market, and can even close down, taking your money with them. But why does everyone use them, then? And do decentralized exchanges have an advantage?
There are several benefits that centralized exchanges can offer. These benefits are so important that over 70% of crypto traders use only such centralized platforms and never even try DEXes.
1) Speed. Let’s stress this again: trading operations on centralized exchanges are not carried out on the blockchain. It all happens on the exchange servers, so completely off-chain. Only the final settlement is on-chain — when you withdraw your crypto to a personal wallet. But if you exchange your crypto profits for fiat on the exchange and send it to your credit card, there will be no blockchain settlement AT ALL.
Centralized servers are very fast. Binance can process up to 1.4 million operations each second. Ethereum can hardly process 25. Stellar can get up to 2500, maybe. Vitalik Buterin says that Ethereum might reach 10 000 after proper scaling, when proof-of-stake and sharding are introduced. But the sad truth is that this will take years — and Binance is there already.
There are various technologies under development to make decentralized exchanges faster. In our upcoming posts, we’ll talk about them. 2Ether is studying various options for its 2EtherDEX, and we will do our best to build the fastest decentralized exchange on the market. But we can’t promise it will be fast like Binance — because there is no such technology in the decentralized space yet.
2) Fiat markets. Most big trading platforms (Bittrex, Poloniex, etc.) have crypto-fiat pairs. Usually it’s USD, sometimes EUR. Many exchanges have over 20 USD pairs (markets). If you trade Bitcoin for USD, you can instantly withdraw those dollars to your credit card.
Fiat transactions aren’t possible on the blockchain. You can tokenize fiat currencies and send them over the blockchain (as Stellar does), you can create stablecoins (USDT etc.), but you simply can’t exchange BTC for USD on a DEX. So as a DEX user, you first need to exchange your fiat cash into crypto through some external service. Then you can transact with that crypto on a DEX.
3) Interoperability. On a centralized exchange, you can freely trade pairs that include currencies built on different blockchains. For example, BTC/ETH seems like a completely normal market, right? But in fact, you can only do that on Binance or Poloniex because they are centralized. The most intelligent people in the crypto industry are looking for ways to perform cross-chain transactions for real — but there is no good solution yet.
So when you trade on a DEX, you need to choose a certain blockchain and then a pair of two assets that are both built on that blockchain. For example, ETH and any ERC20 token are fine, or XLM and any Stellar token.
These issues can seem very serious, and they are. At the same time, DEXes have their own advantages. Roughly 30% of traders do use them, after all. Next time, we’ll look at these advantages. Meanwhile, we invite you to subscribe to 2Ether on Twitter — this way you won’t miss any of our updates!
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