‘DEX’ is short for decentralized exchange. DEXs have been the subject of much hype and have been tipped to take over from centralized exchanges. So far, like much speculation in the blockchain industry, these claims are yet to materialize.
The benefits of DEXs are obvious. For one thing, they are far cheaper than centralized exchanges. Most exchanges charge a hefty credit card fee of 3% for direct purchases. For trading platforms, the fees are usually around 0.25% – 0.75%. These fees add up for traders with trading volumes in the tens of thousands of dollars. With a DEX, fees are tiny, often below 0.1%.
But a bigger benefit of DEXs is that they circumvent governmental intrusions in the form of KYC and AML requirements. These requirements were introduced following the 2008 crash of the housing market and the Eurozone financial crisis. Consumers were targeted after these crashes and were forced to give up an invasive level of documentation to federal authorities.
Federal departments have gone after centralized cryptocurrency exchanges in order to obtain information about people trading in cryptocurrency. This is mainly for tax purposes, although Bitcoin should not be subject to any tax as it’s not tied to a particular location, not accounted for within any tax code, and not tangible in nature. Additionally, retroactive taxes are unconstitutional, and still the government has been trying to tax people for generating gains on an asset they are yet to classify.
The initial reason that Bitcoin was created was to get around governmental tracking. With a DEX, there is no reporting or tracking, so civilians can remain anonymous. Coinbase had to give up information on 14,000 accounts to the IRS. Other centralized exchanges, such as Kraken, have been more resilient.
Right now, DEXs are not fully operational. The main reason for this is liquidity. Centralized exchanges have third-party agreements in place with counterparties to resolve liquidity issues. In short, this means that trades get executed on time. With DEXs, the liquidity is not as robust, and many orders do not get fulfilled. For traders, this is too costly and it’s not worth the effort. DEXs also run into regulatory issues. The IRS and similar entities certainly are not keen on exchanges that do not adhere to regulations.
The obvious problem is that they aren’t functional right now. It could easily be 5 or 6 years before all the wrinkles are ironed out. And customers would still have to complete their due diligence. As these entities are not regulated, they could be a hotbed for scammers and fraudsters. Centralized exchanges are currently the only viable option, and investors need to choose their exchanges wisely.
Problems aside, DEXs are definitely the future. They are decentralized and trustless. This means that your information is kept private. They are also far cheaper, meaning they are better across the board. They will eventually take over from centralized exchanges as a means of trading cryptocurrency.