The Future of Decentralized Finance on Exchanges

The homestretch of 2022 has seen public trust in centralized crypto exchanges take a major hit, following the fallout from prominent, poorly run centralized exchanges. Centralized cryptocurrency exchanges offer users convenience, but this comes with a significant trade-off when it comes to security and privacy.

Throughout the history of cryptocurrency, we’ve seen major hacks and data breaches at centralized exchanges and regulatory risks. Centralized exchanges keep transactions off-chain, meaning they can operate with an opacity that can enable bad actors. 

At the same time, large centralized cryptocurrencies can offer the kind of deep liquidity that users need. When you pair convenient access to liquidity with ease of use for newcomers, it’s easy to see why the centralized model of exchanges has, so far, been on the leading edge toward widespread cryptocurrency adoption. 

A clear solution to the debate between centralized and decentralized cryptocurrency exchanges could come in the form of decentralized finance (DeFi) applications that integrate the best of both for users to choose from. A prime example of such an application is Orion Protocol—an aggregator of both centralized and decentralized exchanges that lets users access deep liquidity and trade their assets at the best rates, without sacrificing security or privacy. 

The risks of centralized exchanges (CEXs)

Some experts in the crypto landscape believe the very notion of CEXs is contradictory to the purpose of blockchain technology. Bitcoin was designed to allow transactions to take place peer-to-peer, without going through financial institutions.

2022 has seen high-profile centralized cryptocurrency exchanges reveal their mismanagement and vulnerabilities, but this is nothing new.

Centralization without oversight

While centralized crypto exchanges have seen heavy increases in marketing and visibility in recent years, oversight remains low. Some of the largest centralized crypto exchanges have built public trust by associating themselves with athletes, actors, and other public figures that are respected and trusted by the public. 

Centralized crypto exchanges often take on full ownership of user funds, which they are free to do with as they please, largely without transparency.

The classic adage, “not your keys, not your crypto” remains as true as ever, as when users hand over their private keys to a centralized crypto exchange, they’re fully at the mercy of whatever policy modification, trading freeze, or other unexpected change the exchange decides upon.

When these assets go missing—whether through hacks or mismanagement—there is no guarantee that users can get their funds back. 

How can centralized exchanges improve?

Millions of people have been negatively impacted by CEX meltdowns, leading to further skepticism about centralization in the market.

The leading issue with centralized exchanges is that they currently reside in a gray area where they are not accountable either to users or to regulators.

In the wake of catastrophic mismanagement at some large centralized exchanges, other CEXs have sought to assure users of transparency, pursuing third-party audits and publishing accounts of their holdings and liabilities. 

Centralized exchanges mirror flaws of traditional financial services

Institutions of traditional finance, in spite of all their pitfalls, are subject to a degree of examination and regulation that protects consumers. CEXs function similarly to traditional financial institutions, but lack the same degree of scrutiny.

Traditional financial institutions are largely set up so that funds can be recovered when a bank or broker fails, but no such assurances are made when crypto assets go unaccounted for.

While increased regulation is not in line with the decentralized nature of Bitcoin, it stands to reason that if an exchange is going to operate in a centralized fashion, it should be obligated to operate with transparency and consistency, for the sake of customer protection. 

Benefits of decentralized exchanges (DEXs)

Many crypto enthusiasts believe that decentralized finance is the only viable way forward for the landscape. Bitcoin emerged out of a firm sense of the importance of self-sovereignty and individual ownership as the paths toward freedom.

It is no coincidence that Bitcoin emerged in the wake of the 2008 financial crisis; a widespread distrust in centralized financial institutions and the broader financial system stoked a growing notion that individuals could take control over their financial futures. 

When transactions remain on-chain, full transparency is not just an ideal to strive for—it’s the only possible outcome, and smart contracts are both secure and fully verifiable. Anyone with an internet connection can participate.

A decentralized finance, smart contract, (DeFi) economy, if implemented properly, sidesteps the need for the kinds of consumer protections that centralized exchanges will need to design in order to remain viable. 

Downsides of DEXs

The most notable downside of DeFi exchanges is industry fragmentation, while the number of digital assets is ever-growing.

When users want to trade a variety of tokens in a non-custodial manner, it can involve maintaining access to a number of exchanges and wallets, which can be frustrating, time-consuming, and ineffective. 

Individual DeFi exchanges may not have suitable liquidity to suit users’ needs, and these exchanges may have varying return rates and exchange fees that make trading between exchanges ineffective for users. 

The best of both worlds: decentralized access to centralized liquidity

The ideal future for crypto exchanges is likely for both centralized and DeFi exchanges to exist and serve their different functions based on customer expectations.

Centralized exchanges should be reigned in so they operate with transparency and consistency, allowing users to know how their funds are being managed. 

Meanwhile, DeFi platforms can be unified by way of a unified liquidity aggregator that brings all exchanges onto a single platform.

On such a platform, users can easily compare rates and trade using liquidity collected from exchanges supported by its API. A leading platform of this nature is Orion, which is quickly becoming the most streamlined and user-friendly trading platform in the crypto market. 

Orion and the future of DeFi on exchanges

While decentralized crypto exchanges offer freedom from meddlesome intermediaries, the market is currently fragmented to the degree that engaging with crypto in a trustless fashion can be far from seamless. 

Orion Protocol offers access to most major crypto exchanges, in addition to notable swap pools for yield farming. The project offers seamless access to the largest platforms in crypto, helping users sidestep common problems associated with trading crypto on traditional platforms and prediction markets.

Orion is a non-custodial DeFi platform, meaning—unlike centralized platforms—users don’t give up control of their funds when making financial transactions. Orion matches orders in a peer-to-peer fashion, reducing trading risk and making executions near-instant.

Check out Orion to see how it solves common stumbling blocks with DeFi protocols, making decentralized finance and secure, self-custody available to everyone.