Centralized exchanges have long dominated the crypto space, but due to their centralized nature, they have serious deficiencies. First off, centralized exchanges often compromise the identity of their users in order to comply with the government, and often centralized exchanges freeze and seize user’s funds.
Another serious problem is that centralized exchanges are often hacked, or shut down due to some sort of fraud or failure, and users lose all of their funds.
Also, centralized exchanges arbitrarily delist and list cryptocurrencies, rather than making all cryptocurrencies available. Indeed, some very important cryptocurrencies, such as Monero (XMR), are not available on centralized exchanges like Coinbase due to government regulations.
On the other hand, decentralized exchanges (DEXs) solve most of these problems. In a true DEX, there is no centralized authority, and user’s funds are never seized or frozen, nor is the identity of users ever compromised by the DEX.
Additionally, user’s funds stay in their own personal wallet, and trades are conducted peer to peer with smart contracts, so there is no risk of losing funds if the exchange goes down.
Further, on a DEX any cryptocurrency can be listed, and there is no arbitrary delisting and listing of cryptos, creating a much more diverse trading ecosystem.
All things considered, DEXs seem to be far better than centralized exchanges. However, up to now the volume of DEXs was extremely low compared to centralized exchanges, with less than a billion dollars being traded per month on all DEXs combined.
That is now changing with the explosion of decentralized finance (DeFi) however, which has rocketed the total DEX volume to $12 billion per month, most of which is split between the most popular DEXs Uniswap, Curve Finance, and Balancer.
In fact, as of August DEXs account for 5% of global crypto trading volume, which is a drastic increase from a negligible percentage before.
DEXs still have a long way to go before they overtake centralized exchanges, and it is a David versus Goliath sort of battle, with DEXs being an underdog that no one expects to win. However, the fundamentals are on the side of DEXs, since DEXs solve many of the problems associated with centralized exchanges and it is possible that DEXs will overtake centralized exchanges in the long run.