With institutional investors wary of risks inherent to centralized exchanges (CEXs), attention is returning to decentralized exchange (DEX) models, says TABB Group in Crypto Exchanges: Returning to Bitcoins Decentralized Roots, new research that examines current crypto exchange models, technology and market landscape, the second in a series of TABB reports covering the role of institutional players in the cryptocurrency trading markets and the execution platforms vying for their business.
CEXs currently dominate the cryptocurrency exchange world despite blockchains decentralized architecture, says TABB senior fintech analyst Monica Summerville, head of European research, who wrote the report, But with more than $2 billion in crypto assets stolen to date through fraud or hacks on CEXs and investors subsequent custody concerns, DEXs are gaining attention, offering a peer-to-peer or order book-based, non-custodial, trustless exchange solution, conducting trades on-blockchain, with parties exchanging assets directly, eliminating the need for a central party to hold client funds.
According to Summerville, a fully on-chain order book can be slow and lacks privacy, due to the inherent constraints of a public blockchain. While original DEXs were entirely on-chain, so-called hybrid DEX entrants are introducing innovative twists, combining central and decentralized components, or introducing the use of layered or side chains, to offer best of both worlds solutions. But DEXs still have market structure and technology issues to overcome, including price discovery, liquidity and blockchain interoperability.
Meanwhile, she says, CEXs are taking note and upping their game, with recent announcements from leading CEXs of institutionally-oriented services and moves to offer their own DEX solutions.
The six-page research note identifies hybrid or semi-decentralized models incorporating on- and off-chain components that have launched or are being architected to attract institutional investors away from both CEX and pure DEX models, and covers 11 live DEXs – fully decentralized and hybrids – and eight emerging DEX protocols (dApps).
Crypto Exchanges: Returning to Bitcoins Decentralized Roots and Crypto Trading: Platforms Target Institutional Market, the first in the TABB series, are both available for download by TABB fintech/crypto clients and pre-qualified media at https://research.tabbgroup.com/search/grid. To purchase one or both reports, go to their Executive Summaries at tabbgroup.com.