Centralized Derivatives Exchanges and DeFi Derivatives Exchanges | Tradeoffs
This post is mainly to list the tradeoffs while trading on DeFi derivatives exchange compared to a centralized derivatives exchange, however I will add few observations in general about most of the DeFi projects.
How decentralized are the DeFi derivatives exchanges like dYdX or MCDEX?
dYdX Perpetual Audit
Perpetual is a new perpetual contract market by dYdX that enables users to use native Ethereum-based tokens as…
MCDEX Mai Protocol Audit
Monte Carlo Decentralized Exchange is a decentralized derivatives exchange. Mai Protocol V2 is a system that allows…
How decentralized are DeFi projects in general?
How secure are DeFi projects in general?
https://defihacks.com has mentioned few recent incidents and you can find more if you search about specific projects.
These are the risks involved in experimenting with DeFi derivatives exchanges including basic differences like less liquidity, less volume, etc. What are the positives of using a decentralized exchange? If its really decentralized then few users may prefer it for arbitrage opportunities, non custodial so you hold keys, less compliance issues, different market pairs etc.
Famous centralized derivatives exchanges: Bitmex, Okex, Delta, Deribit, Binance, Bybit, FTXetc.
Positives: Better liquidity, More volume, Customer Support, Secure cold storage used by most of these exchanges, Insurance funds etc.
Negatives: KYC issues in some cases, Custodial, Withdrawals only once a day in some exchanges, etc.
Other issues I observed about DeFi projects using Ethereum smart contracts:
Legal issues and how they will be managed in such experimental governance models: https://www.coindesk.com/makerdao-users-sue-stablecoin-issuer-following-black-thursday-losses
Leigh Cuen wrote an article last year to highlight some of the issues and they basically indicate its just few developers and VCs experimenting with things:
DAI Is Moving Beyond Ether, But DeFi Isn't Decentralized Just Yet - CoinDesk
The Takeaway MakerDAO, the flagship project of 2019's decentralized finance (DeFi) boom, launched the multi-collateral…
Risk of rollback on Ethereum Network:
ETH 2.0 coming from years which will change lot of things if and when its live: https://twitter.com/MartyBent/status/1281585697271484418
EIP 1559: https://github.com/ethereum/EIPs/blob/master/EIPS/eip-1559.md
Gas prices related issues: https://twitter.com/ASvanevik/status/1281275953302380546
Will edit and add more later if I see anything important that I missed.
Conclusion: Decentralized exchanges have tradeoffs and some users will prefer them. Decentralized Bitcoin exchanges like Bisq or peer to peer derivatives using Bitcoin smart contracts can also become better in future: https://blockstream.com/2019/04/19/en-transacting-bitcoin-based-p2p-derivatives/ however I am not sure about the DeFi meme related to Ethereum projects.