Crypto exchanges have long been vulnerable to external hacks, internal misuse of funds, and regulatory crackdowns. But decentralized exchanges (DEXs) can provide strong safeguards against all three of these threats. As interoperability infrastructure makes it possible for DEXs to compete on features like trading tokens issued on separate blockchains, it’s becoming clear that every centralized exchange (CEX) needs a DEX.
CEXs have lost billions in successive waves of attacks: external hacks (Mt. Gox), internal misuse of funds (FTX) and now, regulatory crackdown (Binance and Coinbase), says Sergey Gorbunov, co-founder and CEO of Axelar. Their decentralized counterparts, DEXs, defend against all three.
Decentralization improves robustness against failure and attack, and DEXs are more robust than CEXs. But many users don’t want to manage their own private keys, and custodial (centralized) onramps are needed for mass adoption. On a DEX, transactions are published on-chain and users can verify the integrity of their deposits.
On a DEX, integrating off-chain information can be difficult, requiring complex and fragile “oracles.” On a centralized exchange, it’s easy, says Gorbunov. Centralized frontends can easily handle know-your-customer (KYC) and anti-money laundering (AML) processes, limit what tokens they list and apply other filters required by regulation.
A single CEX, operating with a DEX on the backend, can build multiple frontends to serve various jurisdictions. This setup can provide periodic visibility into where funds are stored and how they are being used, and users can verify their funds are safe using a block explorer.
For many true believers, decentralized exchanges have always been the dream, says Gorbunov. For centralized exchanges, a decentralized backend serves the same function: a guarantee to users that no matter what action a government may take against the exchange operator itself, the pipes used to handle transactions are proof against overreach.