Exploring Centralized and Decentralized Cryptocurrency Exchanges
A Comparative Study of Centralized and Decentralized Cryptocurrency Exchanges
Disclaimer: “This article is a final deliverable from Prof. Luyao Zhang’s project entitled “From ‘Code is Law’ to ‘Code and Law’: A Comparative Study on Blockchain Governance,” supported by the 2023 Summer Research Scholarship (SRS) program at Duke Kunshan University. SciEcon wholeheartedly supports DKU’s noble mission of advancing interdisciplinary research and fostering integrated talents. Our support is solely focused on promoting academic excellence and knowledge exchange. SciEcon does not seek any financial gains, property rights, or branding privileges from DKU. Moreover, individuals involved in this philanthropy event perform their roles independently at DKU and SciEcon.”
Keywords(hashtags)
Crypto Exchanges #Centralized Exchanges #Decentralized Exchanges #Comparative Study #Incident #FTX Collapse
Highlights:
- Research: This article explores the trading process and operational mechanism of Centralized Exchanges (CEXs) and Decentralized Exchanges (DEXs) in the cryptocurrency market, analyzes and compares their advantages and disadvantages, and provides a comparative study on CEX and DEX to help an in-depth understanding of the role of different types of exchanges in the cryptocurrency market.
- Innovation: This article combines the different characteristics of CEX and DEX, presents a case study of the collapse of FTX, explores the risks and potential impact of the event on cryptocurrency exchanges, and provides a reference for the future development of the cryptocurrency market.
- Leadership: This article reflects on the importance of leadership in cryptocurrency exchanges by analyzing the impact of the incident and the market reaction. The article also presents a plan for further research, including data collection and analysis, to explore further the specific impact of events on the market and user choices. This provides guidance and insights for leaders and decision-makers to better respond to market dynamics and risks.
Figure 1: Article Flow Chart (created by Whimsical).
Introduction
The emergence of cryptocurrencies has led to the creation and operation of new globally decentralized networks that have been used to transfer trillions of dollars of value. This is not just a technology unfolding but the rise of a grand social, political, and cultural movement. People will imagine money, banking, and making payments in a whole new way. (World Economic Forum 2020). As a digital asset, the trading of cryptocurrencies has grown tremendously over the past few years and has attracted an increasing number of investors. Cryptocurrency exchanges [1] are crucial in this dynamic and evolving market. Cryptocurrency exchanges are online platforms that support the buying, selling, and trading of various cryptocurrencies, acting as intermediaries to convert digital currencies into other cryptocurrencies or traditional fiat currencies (e.g., USD or EUR). (Worldcoin 2023). They provide a platform for investors to buy and sell cryptocurrencies and facilitate liquidity and trading activity in the market.
There are two standard models in cryptocurrency exchanges, centralized exchanges (CEX) [2] and decentralized exchanges (DEX) [3]. CEXs are managed and operated by a central entity. In contrast, DEXs rely on blockchain technology and smart contracts that allow the trading process to be completed directly between users without the intervention of a central entity. These two different types of cryptocurrency exchanges have different operational mechanisms and trading functions. This paper intends to conduct a comparative study of centralized and decentralized exchanges, exploring the characteristics and applications of the different types of exchanges in the actual cryptocurrency market. This paper will analyze their transaction processes, mechanisms, censorship resistance, and strengths and weaknesses to better understand their role in the cryptocurrency ecosystem. Also, a literature review and preliminary analysis of the actual market situation will be conducted to discover the true state of different types of exchanges. In addition, this paper will introduce a case study of the FTX collapse and explore the risks and potential impact of the event on cryptocurrency exchanges. Finally, it will present further plans, including data collection and analysis, as well as the impact on the cryptocurrency market of the remaining events that can affect exchange monitoring conditions besides industry emergencies, to explore further the specific impact of events on the crypto market and user choice. Through this study, we hope to provide the public with an initial understanding of the mechanics of how cryptocurrency exchanges operate and to inform the future development of the cryptocurrency market.
Overview of Crypto Exchanges
Cryptocurrency exchanges are platforms for exchanging cryptocurrencies for traditional currencies or other assets, providing anonymity and transparency for both sides of the transaction. Cryptocurrency exchanges play a crucial role as intermediaries for trading cryptocurrencies. They provide a platform that brings buyers and sellers together to trade various digital assets or fiat currencies, facilitating the trading of cryptocurrencies and playing a vital role in supporting the growth and adoption of cryptocurrencies.
With the growing popularity of cryptocurrencies, there are now over 300 cryptocurrency exchanges for users to choose from. Typically, cryptocurrency exchanges can be divided into centralized exchanges (CEX) and decentralized exchanges (DEX). CEX is a centralized exchange operating under the control of a centralized institution. CEX is a centralized exchange that operates under the control of a centralized institution. It acts as an intermediary between buyers and sellers, relying on trusted third-party intermediaries to facilitate transactions and ensure the transfer and safekeeping of funds, matching trades in a centralized order book. (Cryptonews 2023). DEX is a decentralized exchange deployed on the blockchain. It connects buyers and sellers directly for peer-to-peer transactions through blockchain-based smart contracts that do not require intermediaries to facilitate the transfer and custody of funds. They are typically built on public blockchain platforms (e.g. Ethereum [4]) and allow users to conduct transactions securely, transparently, and tamper-evidently. (Chainlink 2023). Centralized exchanges such as Binance, Coinbase, and decentralized exchanges such as Uniswap have different features and functions and significant differences in control, security, and user experience. Users should choose the most suitable exchange based on their investment requirements and service needs.
Comparison between CEX and DEX
1.Trading process and operation mechanism
1.1 CEX Trading Process
Centralized exchanges are the most common and traditional type of exchange. They are operated and managed by a centralized institution or company that processes trade orders, manages user funds, and provides a trading platform. Users deposit funds into their accounts on a centralized exchange and trade with other buyers and sellers on that platform. Such exchanges typically offer a user-friendly interface, high liquidity, and a wealth of trading tools. CEX operating in different countries supports cryptocurrencies and fiat currencies, but they all work similarly. The following is a compilation and summary based on the trading steps given on the instructional website. (babypips 2022).
Note: Each exchange platform may have a different user interface, features, and trading tools, that support different fee structures, trading limits, and supported pairs. As a result, the trading process may vary between exchange platforms. Users should understand the trading process and rules of a particular exchange platform in detail before using it.
Step 1: Account registration and verification
Users must register for a personal account on a centralized exchange, providing their email address, username, and password, followed by identity verification through the “Know Your Customer (KYC) [5]” process. During this process, the user must provide personal identification information such as name, date of birth, cell phone number; and official ID to complete the identification process.
Step 2: Deposit and Top-up
After completing the registration and passing the identity verification, the user can deposit funds to the exchange’s wallet. Users can choose between wire transfers, Automated Clearing House (ACH) [6] payments, and credit or debit cards to fund their accounts.
Step 3: Trading
Once the account has been funded, the user can start trading. First, users need to select the desired trading pair [7], such as BTC [8]/ USD [9], ETH [10]/USD. The first currency in the pair represents the base currency, and the second represents the denominated currency. Centralized exchanges support fiat currency trading. Users can buy or sell one fiat currency with another fiat currency without involving cryptocurrencies. Select a trading pair and start filling orders. Users can choose either a market order or a limit order to place an order. A market order [11] means that the user specifies the amount of cryptocurrency to be bought or sold, and the exchange immediately fills the order at the current market price. Due to price fluctuations and liquidity differences in the market, market orders may be filled at a price slightly different from the current market price. A limit order [12] means that the user specifies the price at which cryptocurrencies are to be bought or sold, and the limit order will automatically fill when the market price reaches the price set by the user. Although limit orders can be executed at a price set by the user or better, they may not be filled immediately if the market is unable to meet the user’s price requirement.
Step 4: Aggregation and Execution
The centralized exchange’s aggregation engine matches buy and sell orders to help users find pairs with matching prices and quantities. When the buy and sell orders are matched, the exchange will automatically execute the transaction, transferring the corresponding cryptocurrency and funds from the buyer’s and seller’s accounts.
Step 5: Transaction Confirmation and Settlement
After the transaction is completed, the exchange generates a confirmation message showing the transaction details, such as the quantity, price, and commission. Afterward, the Exchange updates the user’s account balance and records the transaction in the transaction history.
Step 6: Withdrawal
Users can withdraw legal tender to their bank accounts or withdraw cryptocurrency to their wallets. In this process, the user must provide the appropriate bank account information and a specific wallet address, and the exchange will transfer the funds or cryptocurrency to the address specified by the user.
1.2 CEX Transaction Mechanism
The standard trading models of CEX include the Order Book Model [13] using a mechanism of Double Auction [14].
- Order Book Model (OBM)
The Order Book Model is one of the most common and traditional trading models in CEX. In this model, the orders of buyers and sellers are stored in a centralized order book. Buyers can create limit orders, specifying the price and quantity to be purchased. Sellers can also create limit orders, specifying the selling price and quantity. The exchange executes trades by aggregating buy and sells orders based on price and time priority. Buyers and sellers can see all orders in the order book and choose to match existing orders or create new ones.
- Double Auction：
Double auction is one of the centralized exchanges' most common trading mechanisms. In a double auction, buyers and sellers can submit their orders and bids, and the exchange executes the trade by matching buy and sell orders. The final transaction price is determined by matching buy and sell orders, usually based on price and time priority.
1.3 DEX Trading Process
A decentralized exchange is a trading platform based on blockchain technology that aims to eliminate some weaknesses of centralized exchanges. DEX does not rely on a single central institution but rather executes transactions directly on the blockchain through smart contracts and distributed ledger technology. Users can use their cryptocurrency wallets to make peer-to-peer transactions with other traders without depositing funds in the exchange.DEX is an application of decentralized financ ( DeFi ) [15]. DEX typically offers higher security, user control, and decentralization. Like CEXs, DEXs operating in different countries support different cryptocurrencies, but they all work similarly. Below is a general flow of transactions; please refer to the specific cryptocurrency exchange for specific user meetups and operations differences. (babypips 2022).
Step 1: Connect the wallet
Users must first use a decentralized wallet application that supports interaction with DEX as their digital wallet. These wallet applications typically connect to the blockchain network, allowing users to manage their funds and conduct transactions, guaranteeing control over their assets.
Step 2: Deposit and Authorization
The user deposits the cryptocurrency they wish to trade into a smart contract. This typically involves sending cryptocurrency from the wallet to the smart contract address and allowing the smart contract to access and manage these assets. The user must ensure they have enough funds on DEX to execute the transaction.
Step 3: Trading
The user selects the cryptocurrency pair to be traded in the wallet application. The decentralized exchange does not support fiat currency trading, and users can select base pairs such as ETH/BTC or USDT [16]/ DAI [17] or ERC-20 token [18] trading pairs. Same to CEX, users can choose market orders or limit orders to place orders, which are automatically executed by the system.
Step 4: Smart contract aggregation
DEX uses smart contracts for order aggregation and trade execution. When the price and quantity of the buy and sell orders match, the smart contract automatically executes the trade and transfers assets from the buyer’s and seller’s wallets. The process is transparent; all transaction details are recorded on the blockchain.
Step 5: Transaction Confirmation and Settlement
After the transaction is executed, the user can view the transaction confirmation information, including the number of transactions, price, fees, etc. DEX updates the user’s wallet balance accordingly and records the details of that transaction on the blockchain.
Step 6: Withdrawal
After the transaction, the user can withdraw the cryptocurrency from the smart contract to their wallet address.
1.4 DEX Transaction Mechanism
There are many design models for DEX, each with its advantages and disadvantages regarding functionality, scalability, and decentralization. The most common types include Order Book DEX and Automated Market Maker (AMM) [19].
- Order Book Model (OBM):
The order book trading model in DEX is like CEX. Users can create limit orders, specifying the price and quantity to buy or sell. These orders are stored in DEX’s order book and are sorted according to price and time priority. DEX’s internal system executes transactions by aggregating buy and sell orders and transferring funds and cryptocurrencies from buyers' and sellers' wallets. Willing buyers in the order book DEX must wait for their orders to be aggregated with sell orders to complete the transaction. Even if a buyer posts an order “at the top” of the order book near the current transaction price, the order may not be executed. The mainstream order book DEX includes 0x, dYdX, and Loopring DEX.
- Automated Market Maker (AMM) model:
AMM is one of the most common types of DEX. It provides instant liquidity and automatically completes the swap between traders and assets in the liquidity pool to enable coin trading. Unlike the traditional order book model, AMM operates through a liquidity pool that can provide user quotes anytime. Users can exchange tokens in the liquidity pool by performing token exchange operations, while the liquidity pool uses a specific algorithm to determine the transaction price based on the proportion of tokens in the pool. A smart contract determines the exchange rate of AMM. Users have immediate access to liquidity, while liquidity providers can earn passive income by receiving transaction fees. Because AMM provides immediate liquidity and removes the liquidity provision threshold, new tokens can grow explosively on the platform while also facilitating the emergence of various innovative application scenarios, such as stablecoin exchange. However, it is worth noting that under the AMM model, the entire process from market making to trade must be completed on-chain, transactions are vulnerable to network congestion, and users must also pay expensive Gas costs. Mainstream AMM DEX includes Bancor, Balancer, Curve, PancakeSwap, Sushiswap, Trader Joe, and Uniswap.
2.Difference between centralized and decentralized exchanges
Figure 2: Difference between CEX and DEX (source from: https://crypto.news/learn/what-is-a-cex-a-beginners-guide-to-centralized-crypto-exchanges/, created by Miro).
Note: The information provided is based on general observations and may not apply to every CEX or DEX. The regulatory status of DEX platforms can vary depending on their jurisdiction.
Ethereum is well-equipped to build and run smart contracts and decentralized applications, providing a platform for decentralized transactions and supporting the development of many smart contracts. In DEX, cryptocurrency transactions are diversified and can support standard-compliant ERC-20 tokens and other on-chain tokens. (beinsure 2022). In DEX, instead of transferring their assets to a third party, users deduct assets directly from their wallets via smart contracts and record the results of the transactions on the blockchain. It reduces the risk of the organization being hacked and has high security. In addition, due to its nature of allowing peer-to-peer exchange of cryptocurrencies, DEX prevents malicious market manipulation and protects users and, thus, from fraudulent transactions. (CFI Team 2023). Compared to CEX, hacking, digital asset custody, and fraud risks are avoided. However, DEX also has certain limitations. Because of the principles of decentralization, autonomy, and anonymity of DEX, it rarely offers fiat currency transactions and only allows transactions between cryptocurrencies. (Parlour 2021). For users who still need to hold cryptocurrencies, it makes trading inconvenient. CEX, on the other hand, supports trading in mainstream digital currencies such as Bitcoin, Ethereum, etc. but also offers to trade with fiat currencies. CEX relies on its own servers and technical team, and trading is usually quick. (beinsure 2022). In addition, most decentralized exchanges do not offer a convenient and user-friendly process. Users must remember their crypto wallet keys and passwords; otherwise, their assets will be lost forever and cannot be recovered. It makes trading operations somewhat complex. (CFI Team 2023). But CEX also performs weakly in this area. Though CEX’s user-friendly service provides more reliable security for users’ transactions, it charges high transaction fees for its service and convenience, especially for large transactions. (CFI Team 2023).
3.Literature review
The existing literature comparing CEX and DEX provides various insights and conclusions.
While CEXs typically offer a more familiar and user-friendly experience, including features such as order books, advanced trading tools, and customer support, traditional centralized token exchanges have been subject to hacking attacks because of the centralized management of user tokens. In contrast, decentralized token exchange maintains users’ assets in a decentralized manner through smart contracts but introduces additional overhead in terms of gas fees and transaction confirmation delays. (Luo et al., 2019). CEXs typically provide higher liquidity because of their centralized nature, institutional participation, and regulated environment. Aspris et al. (2021) investigated the role of decentralized marketplaces using a large sample of tokens traded exclusively on decentralized platforms. The results show that centralized listings lead to a shift in trading volume away from decentralized platforms, indicating a strong preference by token holders for deeper, more liquid markets over the higher security and anonymity offered by decentralized exchanges. (Aspris et al. 2021). However, some literature suggests that certain leading DEXs achieve significant liquidity through innovative mechanisms. Barbon compares the market quality of decentralized blockchain exchanges and centralized crypto exchanges. Their analysis of transaction costs and deviations from the no-arbitrage condition shows that CEXs and DEXs have similar liquidity, but DEX prices are less efficient. While the main frictions of DEXs are high transaction fees and the cost of natural gas for blockchain transactions, CEX involves significant risks and delays associated with delegated escrow. (Barbon and Ranaldo 2021).
Synthesizing the findings of the existing literature, it is important to consider and compare context and specific features. As the cryptocurrency industry rapidly evolves, new technologies and developments may affect the validity of previous conclusions. In addition, limitations may arise because of the diversity of platforms, regulatory changes, and evolving user preferences. Therefore, comparing CEX vs. DEX needs to be context specific and conclusions updated continuously.
4.Top 10 Cryptocurrency Exchanges
Figure 3: Top 10 Crypto exchanges ranked by trading volume (24h) (source from: https://messari.io/exchanges selected on June 19, 2023, created by Miro).
Based on the 24-hour reported trading volume, we can see that CEXs have larger trading volumes. Among the top ten exchanges, the top five are CEX, with higher reported trading volume than the bottom five. However, based on market value, Uniswap (v3) has the largest number of markets (5893), about 1.7 times higher than Binance’s (3439).
By comparing these two data, trading volume and the number of markets, we can draw preliminary conclusions:
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CEX exchanges dominate: most of the exchanges in the top 10 are centralized exchanges. These exchanges have larger trading volumes, showing their dominance and liquidity in the market.
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Presence of DEX: Despite being relatively small to trade volume, Uniswap (v3) is the only decentralized exchange (DEX) in the top ten. And it has more markets (5893) than most CEXs. This shows that DEX has an advantage in terms of market diversity.
In summary, comparing trading volume and several markets shows that CEX exchanges are dominant concerning trading volume, while DEX exchanges are competitive regarding the number of markets. Based on the comparison of trading volume and market volume, it is difficult to quantify the popularity of DEX versus CEX among users.
Case Study
2022 has been a year of reputational setbacks for centralized exchanges. In particular, concerns about CEX inevitably emerged because of the collapse of the Futures Exchange (FTX) [20], a prominent centralized cryptocurrency exchange. On November 11, 2022, FTX Trading, a well-known cryptocurrency trading platform, announced that it and other FTX Group subsidiaries had started voluntary bankruptcy proceedings under relevant U.S. laws. FTX was founded in 2019, with over 1 million; the impact of the collapse crisis on the fragile bear market was nearly devastating. Following the rapid fermentation of the incident, the prices of cryptocurrencies such as Bitcoin and Ether have dived, with the price of Bitcoin falling 12% to just under $16,000 by 4:30 p.m. ET on November 9, hitting its lowest point since November 2020, according to data provided by Coin Metrics. (Machel 2022). With the cryptocurrency market cap losing about 20% in November 2022, the collapse of FTX has dealt a huge blow to investor confidence. (Jalan and Matkovskyy 2023).
Figure 4: FTX Logo.
Jalan et al. (2023) explore whether the FTX collapse created significant systemic risk (SR) in the cryptocurrency system by examining the FTX event. They find that the recent series of crises in crypto markets did not lead to significant systemic risk and liquidity shortages. The FTX crisis represented a failure of corporate governance and regulation rather than cryptocurrencies per se. (Jalan and Matkovskyy 2023). Yousaf et al. (2023) suggest that the collapse of the FTX was largely irrelevant to traditional assets and that traditional investors were already indifferent to cryptocurrencies before the FTX collapse. (Yousaf, Riaz, and Goodell 2023). In contrast, Kerr et al. argue that the FTX scandal in late 2022 made fraud a genuine concern for current and potential future investors. Fraud cases and the extreme volatility of cryptocurrencies suggest that investing in cryptocurrencies is much riskier than traditional stock market investments. (Kerr et al. 2023).
Although the collapse of FTX was only a short-term liquidity event, it again shows the hidden risks of transparency and the dangers of trust that are most lacking in the virtual currency market. This situation chooses a trusted platform even more precarious, as centralized exchanges face unprecedented difficulties. As a result, users may consider going to DEX as an alternative to CEX. In addition, the Decentralized Finance (DeFi) movement has substantially impacted the adoption of decentralized exchanges, and the scales seem to tip in users’ minds in favor of DEX.
DEX is designed as a peer-to-peer marketplace with no central authority. Decentralized exchanges do not keep private keys or user order data, and all transactions are executed automatically through the blockchain, significantly reducing the risk of hacking organizations and providing a high level of security. Compared to CEX, DEX does not require the payment of high service fees, and therefore its transaction costs are lower. Although DEX performs better than CEX, DEX also has certain limitations. Because of the principles of decentralization, autonomy, and anonymity of DEX, DEX rarely offers fiat currency transactions and only allows transactions between cryptocurrencies. For users who still need to hold fiat currencies, trading is inconvenient. In addition, DEXs are typically unregulated and self-regulated, with no central authority to control and manage them, and users are required to secure their wallets and private keys on their own.
While the FTX collapse has had a deeper impact on the crypto market and may have caused some users to lose confidence in CEX, the decision to choose an exchange depends on the user’s choice and is influenced by many complex factors. In the emerging cryptocurrency market, factors such as regulation, performance, and fees are all key considerations. Each user may have different needs and preferences for an exchange. Some users may be more focused on decentralized features and control, and they may choose a DEX because they do not require trust in a centralized institution and offer greater privacy and security. These users may be more concerned with financial security and autonomous management. On the other hand, other users may be more interested in regulating and protecting a centralized exchange. Centralized exchanges are regulated and offer additional layers of security, including fund insurance and user authentication. These users may be more focused on transaction speed, liquidity, user experience, and connectivity to the traditional financial system. In addition, factors such as market conditions, exchange availability, transaction fees, and supported pairs may influence the user’s choice. Users must consider these factors together and make decisions based on their needs, risk tolerance, and preferences. Thus, while the FTX collapse may have raised concerns for some users about centralized exchanges, the decision to choose an exchange is highly personal and influenced by various complex factors. Whether and what impact the FTX collapse had on users’ choice of cryptocurrency exchanges requires further analysis of the data collected.
Further Plan
The collapse of FTX has had a broad impact on the crypto market, with the event potentially causing market uncertainty and investor concern, with a knock-on effect on overall market sentiment and confidence. However, it is difficult to draw definitive conclusions based on intuition or observation alone, and an accurate assessment of this impact requires collecting and analyzing a range of relevant data to gain deeper insights. Moreover, the impact of a single event is limited. When it comes to event research in the cryptocurrency industry, we also need to consider a series of events that have significantly impacted the industry. Besides the unexpected events in the industry itself, the policy regulation of the cryptocurrency industry by government and industry regulators is also a very important influencing factor. For example, the sanctions issued by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) [21] following the Tornado Cas [22] incident and the [U.S. Securities and Exchange Commission (SEC)'s] (https://www.sec.gov/) [23] regulations on centralized crypto exchanges; and the Chinese government’s ongoing restrictions on cryptocurrency banking. Examining this series of policy events regarding market regulation is also crucial to analyze the level of trust in the crypto market. The loopholes in regulation that have been present in the cryptocurrency market, as reflected by the FTX incident, need to be urgently addressed.
For a more scientific and comparative analysis, in the next step, we will collect and analyze CEX and DEX trading data in an event study of incidence, including FTX crushes. The following are some key trading indicators:
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trading volume: record the trading volume data before and after the collapse of FTX. This includes the total trading volume of the entire market in top centralized and decentralized exchanges and the trading volume involving FTX. By comparing these data, we can understand the impact of the collapse event on the overall market and the trading volume of the assets involved in the FTX tokens.
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trading pairs: collect data on individual trading pairs in the exchange before and after the FTX collapse, including indicators such as liquidity, trading depth, and bid-ask spreads. Comparing these data can help us understand the impact of the FTX collapse on the liquidity and trading activity of specific trading pairs.
By collecting this data and comparing exchange metrics before and after the FTX collapse, we can analyze the impact of the FTX collapse on the crypto market in a comprehensive manner. This will help us better understand the impact of the collapse and how market participants reacted to the event. Such an analysis will help provide insight into the crypto market dynamics and provide a valuable reference for future research.
Conclusion & Discussion
Through a comprehensive analysis, we aim to gain a deeper understanding of the dynamic nature of the cryptocurrency market and provide a valuable reference for future research. Reviewing the research, it is clear that the cryptocurrency market is constantly evolving and subject to various risks and uncertainties. This comparative study of CEX and DEX leads us to the following conclusions:
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CEX and DEX have advantages and limitations regarding trading mechanisms, user experience, security, and liquidity. The choice of the right exchange depends on one’s security, control, and anonymity needs.
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The collapse of FTX has had a significant impact on the crypto market, triggering uncertainty and investor concerns. However, choosing an exchange is highly personal and influenced by multiple complex factors.
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Further research is needed to collect and analyze relevant data to gain insight into the impact of the FTX collapse on the crypto market and trust in CEX and DEX. This will help us better understand the event's impact and how market participants reacted.
A comparative study of centralized and decentralized exchanges reveals that centralized exchanges offer higher liquidity and trading capabilities but require users to trust the exchange's security. On the other hand, decentralized exchanges focus on user privacy and security, giving users greater control over their funds. By comparing the trading mechanisms of the two exchanges, we find that although their trading principles are different, their functions are different, and each has its characteristics in terms of user service effects; by comparing their advantages and disadvantages, we find that both exchanges have their focus and need to be selected from the user’s needs; by reviewing the literature we find that the comparative analysis differs in different contexts and time frames and requires a specific analysis according to the actual situation; and By comparing the number of transactions and market numbers of the top 10 exchanges in the market, we cannot draw a consistent conclusion, and therefore, we cannot get a clear conclusion about the user preference for centralized versus decentralized exchanges. In addition, the collapse of FTX is a reminder to the public of the risks and uncertainties of cryptocurrency exchanges. Users need to weigh different factors when choosing an exchange and deciding based on their personal needs and preferences; various events have also impacted the development of the industry and its subsequent services, so we cannot draw accurate conclusions about the specific impact of events on the crypto market from existing research and further analysis and exploration is needed. The FTX collapse is a reminder that the cryptocurrency trading ecosystem requires trust, security, and transparency. We also need to investigate and analyze the various events that may affect the crypto market to conduct further research to prove the specific impact of incidents on the crypto market. Future research shall continue to monitor market developments, regulatory changes, and technological advancements to ensure the growth and stability of the cryptocurrency market. Future research can further explore the specific impact of various events on the crypto market, regulatory scenarios, and user choices to predict future trends in the crypto market.
Relevant Materials
[1] Cryptocurrency exchanges
Cryptocurrency exchanges are online platforms where individuals can buy, sell, and trade various cryptocurrencies. These exchanges serve as intermediaries that facilitate the conversion of digital currencies into other cryptocurrencies or traditional fiat currencies, such as the US dollar or euro.
Crypto -Top 10 best crypto exchanges in 2023
[2] centralized exchange (CEX)
A centralized cryptocurrency exchange (CEX) is an online platform that facilitates the buying, selling, and trading of cryptocurrencies. Operating under a central entity, CEXs provide a user-friendly interface and offer features like high liquidity, various trading options, and security measures to protect user funds.
[3] decentralized exchange (DEX)
A decentralized exchange (DEX) is a peer-to-peer platform that enables direct cryptocurrency trading without intermediaries. It operates on a decentralized network, allowing users to maintain control of their funds and trade directly with others, promoting transparency, privacy, and eliminating the need for trust in a central authority.
[4] Ethereum
Ethereum is the community-run technology powering the cryptocurrency ether (ETH) and thousands of decentralized applications.
[5] Know Your Customer (KYC)
Know Your Customer (KYC) is a process used by businesses and financial institutions to verify the identity of their customers. It involves collecting and verifying personal information to prevent fraud, money laundering, and other illicit activities.
[6] Automated Clearing House (ACH)
The Automated Clearing House (ACH) is an electronic payment network in the United States that enables the secure and efficient transfer of funds between financial institutions. It facilitates transactions such as direct deposits, bill payments, and business-to-business payments, providing a reliable and convenient payment solution.
[7] trading pair
A trading pair in cryptocurrency exchanges refers to the combination of two different cryptocurrencies that can be traded against each other. It represents the exchange rate between the two cryptocurrencies and allows users to buy or sell one cryptocurrency using the other.
Gemini — Cryptocurrency Pairs Explained
[8] BTC
BTC, the abbreviation for Bitcoin, is the first and most well-known cryptocurrency based on blockchain technology.
[9] USD
USD, the abbreviation for United States Dollar, is the official currency of the United States and one of the most widely used global currencies.
[10] ETH
Cryptocurrency tokens are used on the Ethereum blockchain for transactions, smart contracts, and decentralized applications (dApps).
[11] market order
A market order is a type of trade executed on a cryptocurrency exchange at the current market price. It ensures immediate execution but may result in a slightly different price than anticipated due to fluctuations in market conditions.
[12] limit order
A limit order is a type of trading order in which a user sets a specific price at which they are willing to buy or sell a cryptocurrency. The order will only be executed if the market reaches the set price.
[13] Order Book Model (OBM)
The Order Book Model (OBM) is a key concept in cryptocurrency exchanges. It represents the list of buy and sell orders for a particular cryptocurrency, providing transparency and enabling users to view the current market depth and make informed trading decisions.
[14] Double auction
Decentralized Finance (DeFi) refers to a financial ecosystem built on blockchain technology that aims to eliminate intermediaries and provide open, permissionless financial services to anyone with an internet connection. It encompasses various decentralized applications (DApps) offering services like lending, borrowing, trading, and yield farming.
[15] decentralized finance ( DeFi )
Decentralized Finance (DeFi) refers to a financial ecosystem built on blockchain technology that aims to eliminate intermediaries and provide open, permissionless financial services to anyone with an internet connection. It encompasses various decentralized applications (DApps) offering services like lending, borrowing, trading, and yield farming.
[16] USDT
USDT (Tether) is a widely used stablecoin in the cryptocurrency market, pegged to the US Dollar, providing stability and liquidity for trading and transactions.
[17] DAI
DAI is a decentralized stablecoin cryptocurrency on the Ethereum blockchain, maintaining a value of approximately $1 USD through smart contract mechanisms.
[18] ERC-20 token
ERC-20 is a widely adopted standard for creating and managing tokens on the Ethereum blockchain. It ensures compatibility and interoperability among different tokens, enabling seamless integration with wallets and exchanges. ERC-20 tokens power numerous decentralized applications and facilitate crowdfunding through Initial Coin Offerings (ICOs).
[19] Automated Market Maker (AMM)
An Automated Market Maker (AMM) is a decentralized protocol that enables the automated trading of cryptocurrencies without relying on traditional order books. It uses smart contracts to provide liquidity and facilitate trades based on predetermined mathematical algorithms and pools of funds.
[20] Futures Exchange (FTX)
Futures Exchange (FTX) is a prominent cryptocurrency exchange founded in 2017. With a focus on innovative trading products and features, FTX offers a wide range of cryptocurrencies and derivatives. It has gained recognition for its user-friendly interface, advanced trading tools, and a strong commitment to compliance and security.
[21] the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC)
The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) is responsible for enforcing economic sanctions and trade restrictions to advance U.S. national security and foreign policy objectives.
[22] Tornado Cash
Tornado Cash is a decentralized privacy protocol built on the Ethereum blockchain. It enables users to engage in private and untraceable transactions by utilizing zero-knowledge proofs and smart contracts.
[23] the U.S. Securities and Exchange Commission (SEC)
The U.S. Securities and Exchange Commission (SEC) is a regulatory agency responsible for overseeing and enforcing federal securities laws in the United States. Its main mission is to protect investors, maintain fair and efficient markets, and facilitate capital formation.
About the Author
Xintong Wu
Figure 5: Xintong Wu.
Xintong Wu is a student in the Class of 2025 at Duke Kunshan University, majoring in Computing and Design. Her interests are digital design, digital market research, and metaverse. She hopes to delve into the dynamic interactions between technology and society in the future Web 3.0 era and explore the infinite possibilities that technology can bring. Through the research with Prof. Luyao Zhang, she hopes to create new digital virtual worlds of diversity, interdisciplinarity, and infinite possibilities.
Acknowledgments
My sincere appreciation to SciEcon Insights and its directors:
Interim Executive Editors: Xintong Wu, Wanlin Deng
Associate Editor: Xinyu Tian
Chief Editor: Prof. Luyao Zhang
Design: Yixuan Li