Centralized exchanges are facing challenges, with the US Securities and Exchange Commission (SEC) accusing Binance and Coinbase of violating multiple laws, while decentralized competitors are “getting closer and closer.” These competitors focus on various verticals, such as efficient stablecoin swapping, perpetual contract trading, and universal token swapping. This article compares these three common centralized exchange functions to compare them with their decentralized counterparts.
The most common exchange function is to trade one cryptocurrency for another. Coinbase has very high fees ranging from 1.5% to 3%, depending on the order size. Binance’s fees are lower, ranging from approximately 0.4% to 0.1%. Binance once allowed users to pay transaction fees with BNB (Binance’s native token) at a 25% discount, but the service has been discontinued due to concerns that it would make BNB more like a security. One of the biggest advantages of centralized exchanges is their high liquidity, with a spread of about 1% when buying up to $10,000 worth of bitcoin.
The largest general DeFi exchange is Uniswap. Surprisingly, its decentralized automated market maker model offers very similar or even better rates compared to its centralized competitors. It has three trading fees of 0.05%, 0.30%, and 1% depending on the type of traded asset and its volatility. The liquidity for top assets is very high, with conversions of $100,000 USDC to BTC being ten times faster than on Coinbase, with a slippage of only 0.14%. In addition, Uniswap allows liquidity providers to earn transaction fees from each trade.
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Curve Finance is the largest exchange in terms of locked-in total value (TVL), specializing in trading stablecoins and similar assets, and charging a fee of 0.04%. Some DeFi platforms, such as 1inch Network and Matcha, exist solely to aggregate the best prices from top DeFi exchanges, providing users with the most favorable prices. In summary, these platforms offer the same experience for ordinary users at similar or lower fees, while providing more asset choices and liquidity options.
Perpetual contracts are a type of futures contract that is an agreement to buy or sell an asset at a specific price in the future. Unlike conventional futures contracts with fixed expiration dates, perpetual contracts have no expiration date and can be held indefinitely. Traders often use margin and leverage to take on higher risk positions with the potential for both high returns and losses, betting on the price of the asset to decrease. As a US-based exchange, Coinbase does not offer futures trading, but Binance’s global platform charges a fee of 0.015% and offers leverage of up to 125x.
There are currently two mainstream DeFi perpetual exchanges: dYdX and GMX. dYdX is the older of the two, originally built on Starkware, but is now moving to its own Cosmos-based chain for greater customizability, decentralization, and scalability. GMX is a newer, Arbitrum-based DEX known for promoting the concept of “real yield” and no longer simply incentivizing liquidity mining with its own token, but instead giving users stablecoins or mainstream tokens like ETH, USDT, etc. dYdX allows up to 20x leverage and charges no fees on the first $100,000 of monthly trading volume, then decreasing from 0.02% to zero as trading volume increases from $100,000 to $50 million. GMX charges a fixed fee of 0.1%, significantly higher than other options, but offers leverage of up to 50x.
Overall, decentralized exchanges seem to be equal to or better than centralized exchanges in spot trading, while centralized exchanges are greater than or equal to DeFi in perpetual trading. Another aspect not taken into account is the benefits of decentralized and trustless platforms. On centralized platforms, you must trust that the company will fulfill its promise to secure your funds and allow withdrawals. As we have seen in numerous cases such as FTX, Mt.Gox, and BlockFi, this is far from a 100% guarantee, and the only way to truly own cryptocurrency is to store it in a wallet. Decentralized exchanges never custody funds, and cryptocurrency is never lost unless the trade is successfully executed.
However, centralized exchanges do have their benefits. One key service they offer is the ability to convert fiat currency to cryptocurrency, which is necessary before using any DeFi exchange. Additionally, they are easier to use and may be a better option for those who are not tech-savvy.
Although fiat currency deposits and withdrawals are difficult, the innovation and competitive advantages of decentralized exchanges are overwhelming. Coinbase and Binance’s regulatory difficulties provide a “shortcut overtaking” opportunity for decentralized exchanges, which are likely to capture a large portion of the market share.
Author: Lincoln Murr, Mary Liu
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