2020 has been very kind to the world of decentralized exchanges (DEX) and decentralized finance (DeFi). Unlike the previous years where none of them truly care about DEX-es, it’s been very different this year. Look at Uniswap; it has over $150 million daily volume, which was not thinkable in the previous years.
Many crypto analysts even predicted that Uniswap and other DEX-es would eventually overtake CEX-es (centralized exchanges) like Binance, Huobi, Coinbase, and others. But would this prediction ever come true in the future?
Decentralized Exchanges Are Fulfilling The Prophecy
Before we can answer the above question, we need to first acknowledge the power of the DEX-es. For so many years, DEX-es have been regarded as the future of cryptocurrency trading. So many hacks happened to centralized exchanges (and it’s still happening today, with Kucoin being one of the most recent victims). Too many single points of failure, such as trading bot APIs and others.
DEX-es mitigate those risks because they connect directly to the blockchain. There’s no centralized hot wallet account that stores the user funds and can be withdrawn easily as soon as the hackers compromise the funds. This kind of risk is almost non-existent in Uniswap and the likes. So, the fact that Uniswap eventually becomes mainstream has successfully helped the overall security issues of the crypto trading world.
But we need to keep in mind that DEX-es didn’t become popular because people suddenly care about security. They became popular because people wanted to get all these new DeFi tokens that were instantly made available on Uniswap and others (as there’s nobody to approve new token listing). It’s quite different from CEX-es where a new token listing takes forever and sometimes the project has to pay a hefty sum of money to the exchange.
But, whatever the reason why Uniswap became popular, that’s already in the past. We all can agree that Uniswap and/or other DEX-es will be here to stay and will likely remain popular for the foreseeable future.
DEX-es Still Won’t Replace CEX-es
While some crypto-anarchists believe that eventually, DEX-es like Uniswap will eventually become more popular than even Binance, somehow, I doubt this is true. Even if one-day DEX-es will be the main source of crypto trading, CEX-es will always remain relevant and get a huge chunk of traffic. Why? Here’s why. Because people need CEX-es whenever they want to take profit to fiat currencies.
People use Coinbase or Gemini to exchange their BTC and ETH to fiat and will likely keep doing it for the next few years. And of course, you will always want to use these fiat on/off ramps for the minimal amount of fees. There are crypto debit cards and stablecoin redeemable processes, but most people still find it easier and cheaper to exchange their crypto directly through centralized exchanges.
This is actually why DEX-es still won’t be able to replace CEX-es. Because even though it’s easier and more instant to trade on DEX-es, eventually crypto traders need to take profit. And the way for them to do it is to trade their cryptocurrencies to fiat through centralized exchanges. Maybe one day it would be more convenient and cheaper to do stablecoin redeem. We don’t know. But even then, they still won’t completely replace centralized exchanges.
Just like ATM machines that remain relevant today (even though there are other ways to pay or withdraw cash), I expect the same fate for crypto exchanges in the future. They might get less traffic compared to today, but they will always be here. Also, until DEX-es can solve the ongoing gas fee problems, many traders would still prefer to trade directly on CEX-es.