Can decentralized exchanges replace Binance and Coinbase?

Authors: Lincoln Murr, Mary Liu

Centralized exchanges are in trouble, facing accusations from the U.S. Securities and Exchange Commission (SEC) against Binance and Coinbase for violating multiple laws, while decentralized competitors are "closing in." These competitors focus on various niche verticals, such as efficient stablecoin swaps, perpetual contract trading, and universal token swaps. This article will compare these three common centralized trading functions to contrast them with decentralized counterparts.

The most commonly used swapping function: trading one cryptocurrency for another. Coinbase has very high fees, ranging from 1.5% to 3%, depending on the order size. Binance has lower fees, approximately in the range of 0.4% to 0.1%. Binance previously allowed users to pay trading fees with BNB (Binance's native token) at a 25% discount, but this service has been discontinued due to concerns that it would make BNB resemble a security. One of the biggest advantages of centralized exchanges is their high liquidity; when purchasing up to $10,000 worth of Bitcoin, the spread is about 1%.

The largest general DeFi exchange is Uniswap. Surprisingly, its decentralized automated market maker model offers very similar or even better rates compared to its centralized competitors. Depending on the type of trading asset and its volatility, it has three trading fees: 0.05%, 0.30%, and 1%. The liquidity for top assets is very high; for example, converting $100,000 of USDC to BTC is ten times that of a Coinbase trade, with a slippage of only 0.14%. Additionally, Uniswap allows liquidity providers to earn trading fees from each transaction.

Curve Finance is the exchange with the highest total value locked (TVL), specializing in trading stablecoins and other similar assets, charging a fee of 0.04%. Some DeFi platforms, such as 1inch Network and Matcha, exist solely to aggregate the best prices from top DeFi exchanges, providing users with the best deals. In summary, these platforms offer the same experience to regular users at similar or lower fees, while having more asset options and liquidity provision choices.

Perpetual contracts are a type of futures contract, which is an agreement to buy or sell an asset at a specific price in the future. Unlike conventional futures contracts with fixed expiration dates, perpetual contracts have no expiration date and can be held indefinitely. Traders often use margin and leverage to take on higher-risk positions, with both high potential gains and losses, betting on asset price declines. As a U.S.-based exchange, Coinbase does not offer futures trading, but Binance's global platform charges a fee of 0.015% and offers leverage of up to 125 times.

Currently, there are two mainstream DeFi perpetual exchanges: dYdX and GMX. dYdX is the older of the two, 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 concept of "real yield," no longer solely incentivizing liquidity mining with its own tokens but instead providing users with stablecoins or mainstream tokens like ETH, USDT, etc. dYdX allows leverage of up to 20 times and does not charge fees on the first $100,000 of trading volume per month, then reduces fees from 0.02% to zero as trading volume increases from $100,000 to $50 million. GMX charges a fixed fee of 0.1%, which is noticeably higher than other options but offers leverage of up to 50 times.

Overall, in terms of spot trading, decentralized exchanges seem to be on par with or better than centralized exchanges, while in perpetual trading, centralized exchanges are greater than or equal to DeFi. Another aspect not considered is the benefits of decentralization and trustlessness. On centralized platforms, you must trust that the company will fulfill its promise to securely hold funds and allow withdrawals. As we have seen in numerous cases like FTX, Mt. Gox, and BlockFi, this is far from guaranteed 100%; the only way to truly own cryptocurrency is to store it in a wallet. Decentralized exchanges never hold funds; cryptocurrencies are never at risk of being lost unless a trade is successfully executed.

However, centralized exchanges do have their advantages. One key service they provide is converting fiat currency to cryptocurrency, which is necessary before using any DeFi exchange. Additionally, they are easier to use, making them a better option for those who are not tech-savvy.

Despite the challenges of fiat deposits and withdrawals, the innovations and competitive advantages of decentralized exchanges are overwhelming. The regulatory troubles faced by Coinbase and Binance provide a "curveball" opportunity for decentralized exchanges, which are likely to capture a significant portion of the market share.