Can decentralized exchanges replace Binance and Coinbase?

Most commonly used exchange function: trade one cryptocurrency for another. Coinbase's fees are very high, ranging from 1.5% to 3%, depending on the order size. Binance's fees are lower, ranging from 0.4% to 0.1%. Binance used to allow users to pay trading fees in BNB (Binance's native token) at a 25% discount, but the service has been canceled due to concerns that it would make BNB more like a security. One of the biggest benefits of centralized exchanges is their high liquidity, with a spread of about 1% when buying up to $10,000 in Bitcoin.

The largest general-purpose DeFi exchange is Uniswap . Surprisingly, its decentralized automated market maker model offers very similar or even better rates than its centralized competitors. It has three trading fees, 0.05%, 0.30%, and 1%, depending on the type of asset traded and its volatility. The liquidity of top assets is very high, for example, $100,000 of USDC converted to BTC is ten times that of a Coinbase transaction, with a slippage of only 0.14%. In addition, Uniswap allows liquidity providers to earn trading fees from each transaction.

Curve Finance is the largest exchange by total value locked (TVL), specializing in stablecoins and other similar assets, charging a fee of 0.04%. Some DeFi platforms, such as 1inch Network and Matcha , exist for the sole purpose of aggregating the best prices from top DeFi exchanges to provide users with the best prices. In short, these platforms offer the same experience to regular users at similar or lower fees, while having a wider selection of assets and options for providing liquidity.

A perpetual contract is a type of futures contract, an agreement to buy or sell an asset at a specific price in the future. Unlike regular futures contracts, which have a fixed expiration date, perpetual contracts have no expiration date and can be held indefinitely. Traders often use margin and leverage to take riskier positions with high potential for both gains and losses and bet on a decline in asset prices. As a US-based exchange, Coinbase does not offer futures trading, but Binance's global platform charges a 0.015% fee and up to 125x leverage.

There are currently two mainstream DeFi perpetual exchanges: dYdX and GMX . dYdX is the older of the two and was originally built on Starkware, but it is now migrating to its own Cosmos-based chain for greater customizability, decentralization, and scalability. GMX is a newer, Arbitrum -based DEX known for promoting the idea of ​​"real yield" by no longer simply using its own tokens to incentivize liquidity mining, but instead giving users stablecoins or mainstream tokens such as ETH, USDT, etc. dYdX allows up to 20x leverage and charges no fees for the first $100,000 in trading volume per month, then the fees decrease from 0.02% to zero as trading volume increases from $100,000 to $50 million. GMX charges a flat fee of 0.1%, which is significantly higher than other options, but offers up to 50x leverage.

Overall, it seems that decentralized exchanges are equal or better than centralized exchanges when it comes to spot trading, while centralized exchanges are greater than or equal to DeFi when it comes to perpetual trading. Another aspect that is not taken into account is the benefits of decentralized and trustless platforms. On centralized platforms, you have to trust that the company will fulfill its promise to safely hold your funds and allow withdrawals. As we have seen in numerous cases such as FTX , Mt.Gox , and BlockFi , this is far from a 100% guarantee, and the only way to truly own cryptocurrency is to store it in a wallet. Decentralized exchanges never hold custody of funds, and cryptocurrency can never be lost unless a trade is successfully executed.

Centralized exchanges do have their benefits, though. One key service they provide is the ability to convert fiat to crypto, which is required before using any DeFi exchange. Additionally, they are simpler to use and may be a better option for non-tech-savvy people.

Although fiat currency deposits and withdrawals are difficult, the innovation and competitive advantages of decentralized exchanges are overwhelming. The regulatory dilemma of Coinbase and Binance provides decentralized exchanges with an opportunity to "overtake on the curve", and they are likely to take a large part of the market share.