Can Crypto Exchanges Ever Be Truly Decentralized?

In the most basic sense, there are two kinds of cryptocurrency exchanges: centralized and decentralized.

Last year, Vitalik Buterin, co-founder of Ethereum, went as far as to say that centralized exchanges should "Burn in hell."

"Given institutions typically operate within a specific regulatory sandbox, they are more comfortable trading through centralized exchanges than DEXs. Further, the majority of retail flows are concentrated on centralized exchanges. Using a DEX requires a deeper understanding of wallets and exchange order books than using a centralized exchange such as Coinbase which can be accessed via a smartphone app, and thus has limited the customer pool for DEXs.".

As the phenomenon became more popular last year, many well-known cryptocurrency exchanges like Binance and Huobi decided to use their brand to launch their own decentralized marketplaces while applying the same compliance principles.

Some experts are even reluctant to call those exchanges decentralized.

"Today, most exchanges which call themselves decentralized? exchanges are actually only non-custodial exchanges," said Eyal Shani, a blockchain researcher at consulting firm Aykesubir.

Shani was referring to when U.S. authorities charged Zachary Coburn, the founder of decentralized crypto token trading platform EtherDelta, with operating an unregistered securities exchange.

Thus, even though the McAfee DEX "Does stand out as one of the more decentralized exchanges out there" due to having a decentralized listing process and self-custody on top of requiring no personal information for KYC and AML procedures, "There are still likely central points of failure on the back-end that regulators could target," says Todaro.

"There is a way to run a ?truly? decentralized DEX. But it could potentially be so expensive that it would scare away the small traders. For that to happen, in addition to having no KYC/AML, running the orderbook and saving ?all? data on replicating systems. But even then the government could block those services, fine whoever is involved etc. So we would need a decentralized DNS servers, decentralized ISPs and many more services which are great solutions. Yet, based on the current volume on the so called DEXes, it seems like a solution looking for a problem, rather than a true product-market fit."

"There is a demand for fully decentralized exchanges, but I would expect the vast majority of traders and exchange users to prioritize liquidity, token availability, and ease of use over a platform that 'no one can block.'".