Decentralized Trading Platforms: Advantages and Disadvantages

Despite having existed for over a decade, the DeFi sector is still considered novel and inaccessible to a regular investor. The last couple of years were not kind to the ecosystem with revenues declining across the board and projected growth estimated at -9.98% by the end of 2025. The number of active users is also decreasing but the number of active wallet addresses is growing at an incredibly high pace (281% growth in the first quarter of 2024).

Gas fees and transaction costs are quite low since many protocols are using layer 2 solutions, which can reduce average commissions to less than 0.1%. User experience issues are being slowly addressed too, improving the onboarding process and allowing over 53 million users to interact with various platforms more efficiently. It seems that the DeFi sector is in a good place. The real question is whether decentralized exchanges (DEX) and other protocols can create the necessary depth and flexibility to attract large capital holders.

The peak of the DeFi growth was achieved in 2021 with total revenues skyrocketing to $6.2 billion. However, the large number of questionable projects and scams started negatively affecting the ecosystem driving serious investors away and depleting whatever goodwill was left. By 2023, the total revenue dropped to just $2.18 billion. The next year, it was less than $420 million. Nevertheless, TVLs are slowly climbing back and some DEXes are becoming beacons of change in the sector.

Liquidity pools in DEX

One of the main driving factors in the general stability of TVL (total value locked) numbers is the competition between decentralized trading platforms. The efficiency, fees, and many other factors depend on the available liquidity and DEXes are ready to fight for it. Some are offering cuts of revenues to investors. Others pay in governance, native, or layer 2 tokens to incentivize participation.

Since decentralized governance in trading can be beneficial for individual users, some tokens are quite expensive. For instance, Convex Finance and Curve DEX offer rewards in CRV and CVX tokens. The former is the governance token of Curve Finance. As of October 2024, it is priced at $0.24, has a $291 million market cap, and a solid $82 million daily trading volume.

The DeFi sector is powered by many unique protocols that make interactions between users fully automatic, trustless, and permissionless. While some security experts may say that such a setup may suffer from exploits and technological issues, it is true that automation reduces costs by removing middlemen and increasing the efficiency of investments. For example, smart contract trading can be utilized by platforms to ensure that users can move capital without lengthy confirmations and verifications.

Alongside other positive factors like the increasing diversification within the DeFi ecosystem, rising APYs, and growing user base, automated trading enabled by smart contracts should be sufficient to drive the adoption. However, we are seeing the opposite. So, what is happening in the blockchain industry?

The problem of non-custodial crypto trading

Many crypto enthusiasts believe that non-custodial trading is the way to go. The issue here is that the overwhelming majority of users are not prepared to handle their finances without help from specialized institutions. Banks, investment companies, and brokers exist for a reason. Despite the improving onboarding process making it easier for newcomers to get started, there are still too many entry barriers to break through.

Here are steps that typically must be made by beginners:

1. Creating a wallet address that has separate credentials from the wallet application itself.
2. Finding a good protocol on the chain chosen for investment operations.
3. Connecting the wallet to the protocol and interacting with the protocol’s smart contract.
4. Managing investments through portfolio tracking tools that have a better UI.
5. Make sure to track digital asset prices to avoid impermanent loss, sudden liquidation, and more.

All these steps must be made using applications that have interfaces different from what typical investors are used to. Many dangers are still not explicitly stated by protocol developers leading newcomers to less-than-optimal capital allocation. The difficulty of becoming familiar with all these protocols and their smart contracts is the main reason why individual investors are afraid to explore the world of DeFi.

Automated market makers (AMM) to the rescue

One of the biggest advantages of the decentralized crypto trading industry is the existence of AMM services which are protocols. These access liquidity pools that usually contain two assets. Smart contracts are designed in a way that ensures that swaps occur at favorable rates for investors and secure the difference between bid and ask as revenue. In essence, they, as the name suggests, perform the role of market makers in tradfi. In 2024, the total market cap of all AMM protocols exceeded $10.7 billion.

Order book vs AMM models

The main goal of an automatic market maker is to ensure that users can swap their assets quickly in a trustless and permissionless manner while securing profits for liquidity providers. Order books on exchanges are often scanned by traders manually or by highly specialized bots. It means that market-making can be done by exchanges themselves, institutions, and even wealthy individuals. People with agendas can easily manipulate markets through high-frequency trading and sway prices in any direction.

Automated market makers are often powered by open source smart contracts allowing all users to verify the integrity of the code and fairness across the board.

The role of DEX aggregators

DEX aggregators are slowly reshaping the DeFi sector. Aggregators are special protocols that can tap into liquidity pools on different decentralized exchanges and other protocols to ensure that users have access to the best rates. Unfortunately, the popularity of these protocols is dwindling due to difficult onboarding and smart contract inefficiencies.

In 2024, of 57 tracked DEX aggregators only 14 protocols had experienced at least some user activity. The combined TVL of the subsector is close to $5.6 million with the biggest platforms like 1inch and OpenOcean controlling over 87% of the market volume. While these numbers may seem small, they are serving a massive volume of operations. For example, 1inch is responsible for over 106 million completed trades with a total volume exceeding $522 billion.

Hopefully, these protocols will be growing to ensure that everyone has access to low-cost transactions in the DeFi sector.

Advantages of contemporary blockchain-based trading platforms

Decentralization is one of the biggest reasons to make a switch from CeFi to autonomous protocols. Users who are interested in non-custodial financial services can operate in an environment free of counterparty risk while using a wide range of investment instruments simply unavailable in the world of tradfi.

Here are some advantages of using decentralized exchanges:

• Stronger security. It is true that decentralized exchanges do not have a single point of failure and may appear safer to many individuals. However, the burden of keeping capital safe is carried by investors themselves which can be a significant downside in some cases.
• Privacy and anonymity. Over 70% of US citizens are concerned with how corporations handle their personal information. You don’t have to provide sensitive data to DEXes, although some of them are starting to adopt some practices outlined in KYC and AML guidelines.
• Cheaper transactions. This is the biggest advantage of the sector. Since protocols do not have corporate overheads and high operational expenses, users can enjoy low fees. In some cases, you will be paying less than 0.1% per transaction compared to many CEXes with fees close to 0.5%.
• Unique investment opportunities. DEXes are usually the first to list emerging tokens and digital assets without great exposure. It means that investors can become early adopters and engage in a variety of investment activities with varying degrees of risk.
• Flash loans and arbitrage can be done within the DeFi sector to quickly finance various investment activities, increase liquidity, and efficiently trade assets. These instruments are partially enabled by operations on decentralized exchanges. It means that DEXes create cash flow and generate activity throughout the whole crypto ecosystem.
• User control over operations is another reason why so many people are flocking to the DeFi sector. DEXes are inherently independent and cannot be controlled by centralized entities. It means that accounts cannot be frozen or emptied by power-wielding individuals and institutions.

Many contemporary platforms are also offering efficient cross-chain interoperability bridging the gaps between different blockchain architectures. If you are interested in exploring the world of DeFi, it is a good idea to take a good look at various protocols that allow users to send assets from one chain to another. The technology is still rough around the edges and needs fine-tuning but you can already use all sorts of tokens across the whole DeFi sector.

Disadvantages of peer-to-peer token swaps

All the benefits listed above are enough to attract millions of investors but the pace of DeFi growth is still limited due to multiple reasons. All of them can be addressed in the future even by existing protocols but we are not yet at the level that allows for wide adoption.

Here are some downsides of using DEXes:

• Smart contract vulnerabilities. MakerDAO and many other protocols have generous bug-hunting programs offering up to $10 million to security experts who can find critical vulnerabilities in their smart contracts. Such payouts exist due to the troubled history of the DeFi sector plagued with hacks and exploits often leading to hundreds of millions in lost funds.
• Liquidity shortages leading to slippages happen way too often for many DEXes to become viable targets for large-scale traders. Decentralized protocols are still dwarfed by CEXes which handle over 90% of the trading volume in the crypto market.
• Insufficient KYC/AML compliance in decentralized finance. While many crypto enthusiasts believe that it is good that protocols do not enforce KYC/AML guidelines and do not collect personal information, the lack of regulatory frameworks negatively affects the industry. There is no consumer protection and users do not have meaningful options for legal recourse if something goes wrong with their investments.

These issues can be incredibly difficult to tackle for the industry that is still developing. For instance, taxation is still a problem as the IRS states that the US government is missing out on over $50 billion thanks to unreported gains acquired through decentralized crypto trading. 

DEX VS CEX comparison

To round up the discussion, we want to give you a surface-level comparison between centralized and decentralized exchanges in the neat table below.