Crypto Exchanges: Returning to Bitcoin’s Decentralized Roots
A centralized model currently dominates the cryptocurrency exchange world, despite blockchain’s decentralized architecture. With institutional interest in cryptocurrency trading growing, and increased awareness of the hacking risks of centralized solutions, attention is returning to decentralized exchange (DEX) models. Centralized exchanges (CEX) have far greater liquidity than DEXs, but institutional investors have concerns over handling of custody, in particular. Inherent issues with using a public blockchain, such as network latency and lack of privacy, make pure DEXs largely unsuitable for these participants. Hybrid DEXs offering trustless, non-custodial settlement, coupled with centralized price and order handling components, are gaining traction.
Proponents of hybrid DEX models, whether peer-to-per or order book-based, claim these offer the best of both works. These are being architected with a mix of on-chain components for low latency and privacy as well as on-chain components for non-custodial settlement. How they solve issues around liquidity, price discovery and latency, will be key in supporting adoption.
As with many blockchain initiatives, the ability for DEX models to deliver on its promise, hinges on advancements to the underlying blockchain technology, for example inter-chain operability. Meanwhile, CEXs are taking note and upping their game, with recent announcements from leading CEXs of institutionally oriented services and/or moves to offer their own DEX solutions.
This Market Note examines current cryptocurrency exchange models, technology, and market landscape. It includes a list of live DEXs and emerging DEX protocols.