The traditional financial ecosystem is built on centralized structures that comprise various stakeholders. Monetary authorities such as the federal reserve and central banks act as the policymakers or rather the pinnacle of legacy finance. Ideally, these bodies make monetary policy decisions that involve money supply and development infrastructure as part of their mandate to keep economies in check.
While the monetary authorities are meant to operate as neutral players, they favour acting governments or influential individuals. This is because the personnel who work for these bodies can be compromised or coerced to make certain decisions. In essence, the fate of a whole country’s economy could be at the hands of a few individuals with personal interests.
Even worse, some authoritarian governments use their monetary authorities to suppress activities that seem to threaten their control. A good example is the People’s Bank of China (PBoC) which has previously issued warnings against crypto operations, slowing adoption in the region. The PBoC is also in the process of developing its centralized digital currency dubbed ‘DC/EP’ that is set to act as the country’s official digital currency.
The Shortcomings of Centralized Architectures
The centralized architecture of today’s financial ecosystem is further complemented by institutions such as banks, investment companies and insurance firms, amongst other third-party service providers. In crypto, centralized exchanges assume the third-party position by acting as the market makers. These platforms provide crypto investors and traders with the liquidity needed to offset their buy or sell positions.
In most cases, centralized exchanges try to give fair and transparent pricing, although this cannot be fully guaranteed. Their centralized nature gives them an upper hand as they can manipulate prices through wash trading or take advantage of the information asymmetry to rip off unsuspecting clients.
Furthermore, these platforms have proved to be unreliable during times of high market activity. Popular crypto exchanges like Binance and Coinbase were overwhelmed during the bull run to the extent of halting their trading systems at one point or another. We have also seen extreme cases where exchanges such as Robinhood abruptly shut down crypto operations in fear of the regulator’s axe.
Finally, it is cumbersome to register on centralized exchanges as they follow strict KYC/AML rules set by local authorities and international bodies like the Financial Action Task Force (FATF). This has sidelined many potential investors in countries such as the U.S, where financial regulators prioritize consumer protection.
Why DEXs Could be the Alternative
The crypto industry has given rise to decentralized innovations, with most currently built on the Ethereum blockchain. This fast-growing crypto niche eliminates centralized architectures by leveraging blockchain technology and smart contracts to create decentralized markets. Some of the upcoming products include lending and borrowing, derivative instruments and decentralized exchanges (DEXs).
DEXs have gained a particular interest amongst the crypto community, especially those looking for alternatives to escape the cumbersome onboarding process by CEXs. These platforms do not rely on third parties for contract execution; instead, the transactions are verified and authenticated on a blockchain network.
Just like CEXs, DEXs feature a trading interface and matching engines that traders can use for their operations. However, the DEX order book follows an Automated Market Maker (AMM) model to ensure liquidity. Until recently, most DEXs could only operate within a single environment – this narrative is now changing with the invention of Direct Access DEXs such as OrionProtocol.
All-in-one DEXs Access
The crypto ecosystem may be young but not short of innovations. DeFi projects like OrionProtocol bridge the integration gap that has long been a challenge to the crypto market. This protocol gives users access to multiple DEXs, allowing them exposure to the best prices at any time. In addition, Orion users can quickly initiate a transaction as there are no KYC requirements.
With Orion protocol, you only need a wallet to buy crypto assets, including Bitcoin, Ether, USDT stablecoins and DeFi tokens such as Chainlink. This can be done in a few clicks, saving you the tiresome process of registering on a centralized exchange while being at the mercy of its centralized infrastructure.
As it stands, both centralized and decentralized crypto ecosystems work hand in hand. However, the paradigm is gradually shifting in favour of DEXs, with more people realizing the value of decentralization. These ecosystems reduce the burden of dealing with third parties and allow users to maintain their privacy or anonymity. In the future, we are likely to see more action in the DeFi market, which currently enjoys a market cap of $66 billion.
On the Flipside
- Decentralized exchanges are more risky in terms of scammers and fake token issuers. Since DEXes are completely unregulated, such trading platforms are more often exploited by scammers impersonating legitimating DeFi projects.