This article will be unique to most ‘DEX vs. CEX’ articles, in that we will not be explaining the intricacies of what makes a CEX or DEX. Rather, we will go right into the most pertinent contrasting features between CEXs and DEXs, under the assumption that the reader understands the basics of how both of these exchange types work, and we will follow that with a comparison to Sigmadex’s protocol.
This article, for all intents and purposes, is to outline the problems and unique benefits that CEXs and DEXs have, and how the co-evolution of these exchanges can result in the new age of crypto-trading by having the most critical features inherent to both. Let’s jump right in.
CEX Legitimacy vs. DEX Accessibility
CEX requires an extensive amount of auditing for every token that launches on CEX, so the legitimacy of tokens on CEXs is relatively assured. However, unlike DEXs, this lengthy and often financially demanding process of getting one’s token approved on a CEX inhibits quality projects with little capital backing to have marketplace exposure. In line with this, for those who use exclusively CEXs, purchasing and trading these tokens is often not possible, and can result in those investors missing out on new trending niches that are entering the crypto-space.
Sigmadex Solution A
With Sigmadex, while still upholding the permissionless nature of decentralized exchanges, we will be partnering with many verified 3rd party agencies to audit the tokens that come onto the DEX. If these audited tokens are validated for legitimacy, we will provide a verification thumbnail attached to the tokens so that every trader on our DEX knows that these specific tokens have been verified.
This means that, within Sigmadex, users will have the token validation assurances you would have on a CEX, but still have the availability towards start-up tokens that you would regularly have access to on a DEX.
CEX Security vs. DEX Security
Due to CEX undergoing transactions off-chain, their transaction speed and associated cost is often quite lower than DEXs. However, the fact that CEXs use an internal server means that they are highly susceptible to hacks, as the hackers need only to access one server to obtain access to every user’s private key and, therefore, the money stored in each user’s wallet. DEXs, due to its server being an aggregation of computational providence across multiple stakers on the DEX-hosting blockchain, results in enhanced security protection as one would need to hack every single computer to reign control over the platform.
Sigmadex Solution B
Sigmadex solves both of these problems, as it is, as the name implies, a DEX and therefore is decentralized in that the server is an aggregate of multiple computers across the world. While this security enhancement from decentralization would normally lead to on-chain transaction limitations, like other DEXs, Sigmadex is unique in that they utilize Polkadot’s Parachain which inherently has such a high throughput that transaction speed limitations would not noticeably occur when trading on Sigmadex.
With Sigmadex, you get the security enhancements of a DEX, with the transactional speed of a CEX.
CEX Liquid Trading vs. DEX Passive Earnings
CEXs often provide market-making services where the company can provide a great deal of liquidity to tokens on the exchange, leading to less slippage on buy/sell orders for users. Alongside an often-saturated order book due to CEXs tending to have a large user base, trading between tokens on CEX is often quite seamless. On DEXs, however, liquidity is provided by any one person providing 1:1 tokens within a liquidity pool, and can often be limited due to one key reason.
While these Liquidity Providers (LP) on DEXs are rewarded with a portion of the transaction fees that occur in this pool, they are susceptible to impermanent loss. Put simply, impermanent loss results in the loss of an LP’s initial liquidity deposit into the pool if either token diverges in price relative to the other token in the pair.
This often leads to hesitancy by users to provide liquidity to token pairs, and in particular, for startup tokens that often fall victim to high token price volatility. However, being an LP is often quite lucrative if they do not succumb to a high degree of impermanent loss. It is important to note that being an LP on CEXs is simply not possible.
Sigmadex Solution C
The Sigmadex protocol is the first ever to rid the world of DeFi from impermanent loss. While the multitude of mechanisms governing this impermanent loss resistance is quite complex and outside the scope of this article this DEX protocol essentially allows the passive earning potential of being an LP without the risk of monetary loss inherent to being an LP on conventional DEXs.
CEX vs. DEX Summary
As one can see, both CEX and DEX contain unique benefits of their own, but also carry significant risks to their users. Rather than being tribalistic to either trading medium, the crypto-space requires an entirely new medium that amalgamates the best qualities of each.
Summary of Sigmadex's Solutions
That is what Sigmadex is; While it technically is a DEX, it has the transactional speed and token validity assurance qualities of a CEX, while being hack-resistant and having startup token exposure inherent to DEXs. Sigmadex is unique by resisting impermanent loss for LPs within the DEX and provides other assurances from crypto-scams such as rug pulls and the negative effects of arbitrage.
Sigmadex plans on propagating through the entirety of the crypto-space as the new age of crypto-trading, and its exclusivity in ensuring the profitability margins of being an LP without the risk of impermanent loss, amongst its other unique benefits, provides Sigmadex with a unique marketplace power to do so.
Read our other articles in this series to learn exactly how each of these mechanisms works to create the new-age DEX within the DeFi crypto-space. For the savvier mathematical and/or computer science readers, check out our Lightpaper for an in-depth explanation of each of our components; The validity of which is verified through auditable mathematical equations.