Decentralised Exchanges (DEX) -
- No custodial risks - users hold their crypto, versus Coinbase or Binance holding it (or FTX)
- Permissionless - a project does not have to pay a ton to get listed as is the case of centralised exchanges. CEXs charge a lot for tokens to be listed, just look at the amount of listing managers from major exchanges in any conference. https://docs.uniswap.org/contracts/v1/guides/token-listing
- DEX are useful for creating markets on token pairs where there is insufficient demand for professional market makers to participate
- LPs have to provide liquidity in token pairs, that is why we sometimes see Liquidity in Uniswap In Ethereum but no liquidity in L2s and other Alt L1s like Polygon PoS.
- CEXs can delist tokens anytime they like. Some CEXs also tend to strong arm founders to get favorable terms in fund raises. CEX will invest in you and will let you list the token but we want the following terms sort of deal, happens too often
- Though CEX to DEX trading volume ratio is 9:1 according to Coingecko report with Binace holding a lion’s share
- 60% of the DEX trades are likely driven by MEV : CEX - DEX arbitrages, retail traders getting sandwich attacked, back-running
- DEXes compete with CLOB (Centralised Limit Order Book) , OTC desks, RFQ systems
- Systems like UniswapX, compete directly with CEXs through RFQ auction, provide AMM pools as fallback
Issues
- Worse execution than CEX for popular trading paris
- AMMs often don't give the best price. Prices on AMMs only move through trades or through CEX-DEX arbitrage traders.
CFMM (constant function market makers) and constant product market makers (CPMMs) such as Uniswap v2 and Uniswap v3
LVR (Loss versus Rebalancing)