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gloriasir03 / cex_vs_dex

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What are the Differences between a CEX and a DEX? #2

Open gloriasir03 opened 1 year ago

gloriasir03 commented 1 year ago
  1. Core Exchange Features

As you can imagine, CEXs have a long history, one that boasts many innovative features over the years. For example, they offer a range of order types to cater to the different types of traders, from the most basic market and limit orders to the more complex variety such as the iceberg order.

A good CEX also has the ability to provide deep liquidity by collaborating with market makers, and are typically built to support very high throughput (i.e., transactions per second).

In contrast, AMM DEXs are currently only able to support swaps that are instant... for now. However, newer DEXs such as Serum and IDEX are starting to incorporate order books, so that they can provide the best financial products from both worlds.

gloriasir03 commented 1 year ago
  1. Trading Volume Trading volume is a critical measure of financial activity on a platform. Not to mention that tracking trading volume helps measure greater DeFi adoption as well. The chart below shows the monthly DEX trading volume over the years.
gloriasir03 commented 1 year ago
  1. Transaction Fees The transaction fees of a DEX depend on the chain it resides on. For instance, Uniswap, which runs on Ethereum, can cost you $60 depending on network congestion (and traffic on Ethereum can make you wish you never left the house. Since Ethereum runs on an auction model, users have to bid for their transactions to get included in the next block. That's why greater congestion leads to increasingly costly bidding wars, ergo the high fees).
gloriasir03 commented 1 year ago
  1. Risk. While providing liquidity may seem like a good deal, generally, the better the deal, the higher the risk. And in this case, the main risk that comes with these handsome yield rates is one of the scariest things that's ever happened to me. And this financial beast has a name: Impermanent loss. That's when the liquidity you provided has less value when you exit. See, AMMs rely on a mathematical formula to ensure that they always have liquidity for a token pair. This formula is expressed as x * y = k, where x and y represent the individually paired tokens. To ensure that k remains a fixed constant, when someone buys an amount of x, its price rises accordingly, thereby sustaining the fixed value of k.