In terms of spot trading, decentralized exchanges appear to be the same or better than centralized exchanges, while in terms of perpetual trading, centralized exchanges are larger than or equal to DeFi.
Centralized exchanges are in trouble. Previously, the U.S. Securities and Exchange Commission (SEC) accused Binance and Coinbase of violating multiple laws, and later decentralized competitors "step by step." These competitors focus on various niche verticals, such as efficient stablecoin swaps, perpetual contract trading, universal token swaps, and more. This article will compare these three common categories of centralized exchange functionality to contrast them with their decentralized counterparties.
The most commonly used exchange function: trading one cryptocurrency for another. Coinbase’s fees are very high, ranging from 1.5% to 3%, depending on the order size. Binance fees are lower, ranging from 0.4% to 0.1%. Binance once allowed users to pay trading fees in BNB (Binance’s native token) at a 25% discount, but the service has been withdrawn due to concerns that it would make BNB more like a security. One of the biggest benefits of centralized exchanges is their high liquidity, with spreads of around 1% when buying up to $10,000 in Bitcoin.
The largest general-purpose DeFi exchange is Uniswap. Surprisingly, its decentralized automated market maker model offers very similar or even better interest rates compared to its centralized competitors. It has three trading fees, 0.05%, 0.30%, and 1%, depending on the type of asset being traded and its volatility. Liquidity for top assets is extremely high, for example $100,000 USDC converted to BTC is ten times more expensive to trade on Coinbase with only 0.14% slippage. Additionally, Uniswap allows liquidity providers to earn trading fees from each trade.
Curve Finance is the largest exchange by total value locked (TVL) and specializes in trading stablecoins and other similar assets, charging 0.04% fees. Some DeFi platforms, like 1inch Network and Matcha, exist for the sole purpose of aggregating the best prices from top DeFi exchanges to provide users with the best deals. Taken together, these platforms offer the average user the same experience at similar or lower fees, while having a greater selection of assets and options for providing liquidity.
A perpetual contract is a type of futures contract, an agreement to buy or sell an asset at a specific price in the future. Unlike regular futures contracts, which have a fixed expiration date, perpetual contracts have no expiration date and can be held indefinitely. Traders often use margin and leverage to take riskier positions with a high likelihood of gain and loss, and bet that an asset's price will fall. As a U.S.-based exchange, Coinbase does not offer futures trading, but Binance’s global platform charges 0.015% fees and up to 125x leverage.
There are currently two mainstream DeFi perpetual exchanges: dYdX and GMX. dYdX is the older of the two and was originally built on Starkware, but it is now migrating to its own Cosmos-based chain for greater customizability, decentralization, and scalability. GMX is a newer DEX based on Arbitrum. It is famous for promoting the concept of "real yield". It no longer simply uses its own tokens to incentivize liquidity mining, but gives users stable coins. Or mainstream tokens, such as ETH, USDT, etc. dYdX allows up to 20x leverage and charges no monthly fees on the first $100,000 of trading volume, then fees decrease from 0.02% to zero as trading volume increases from $100,000 to $50 million. GMX charges a flat fee of 0.1%, which is significantly higher than other options, but offers up to 50x leverage.
Overall, decentralized exchanges appear to be the same or better than centralized exchanges when it comes to spot trading, while centralized exchanges are greater than or equal to DeFi when it comes to perpetual trading. Another aspect that is not considered is the benefits of decentralized and trustless platforms. On a centralized platform, you have to trust the company to live up to its promise to safely keep your funds and allow withdrawals. As we have seen with numerous cases such as FTX, Mt.Gox and BlockFi, this is far from 100% guaranteed and the only way to truly own cryptocurrency is to store it in a wallet. Decentralized exchanges never custody funds, and cryptocurrencies can never be lost unless a transaction is executed successfully.
However, centralized exchanges do have their benefits. One of the key services they offer is converting fiat currencies into cryptocurrencies, which is required before using any DeFi exchange. Additionally, they are simpler to use and may be a better option for people who are not tech-savvy.
Although fiat currency deposits and withdrawals are difficult, the innovation and competitive advantages of decentralized exchanges are overwhelming. The regulatory woes of Coinbase and Binance provide an opportunity for decentralized exchanges to “overtake” them, and they are likely to take away a large part of the market share.