How Onchain Trading Has Closed the Gap with Centralized Exchanges

Crypto trading has come a long way. Indeed, improvements in infrastructure and UX over the last decade have helped to push the industry’s market cap beyond the $2.25 trillion mark. The greater accessibility granted by a preponderance of trading platforms, wallets, and P2P marketplaces has turned trading from an extremely niche activity to an endeavor that can be taken up by just about anyone, providing they have an internet connection.

Speaking of niche activities, onchain trading was once considered a niche alternative to the sort of trading facilitated by the industry’s leading centralized exchanges (CEXs). But in the last few years it’s evolved into a robust and user-friendly option. While challenges remain, the progress made in addressing key issues has brought onchain trading closer than ever to rivaling its centralized counterparts.

Why Trade Onchain?

For the avoidance of doubt, onchain trading is the process of conducting crypto transactions directly on a blockchain network rather than through an intermediary such as a CEX.

There are many reasons why a trader might choose to go down this route rather than make trades through a centralized orderbook. The most obvious being the greater range of assets available, the elimination of custodial risk, and the enhanced privacy to be gained from effectively flying solo. 

Such benefits tend to attract users craving more control over their funds and access to a broader range of trading opportunities. That said, onchain trading has negatives as well as positives. If this wasn’t the case, CEXs would be toast. Factors limiting the adoption of onchain trading have traditionally included…

Liquidity 

One of the biggest challenges facing onchain trading has been liquidity. Fragmentation across multiple networks and protocols has historically led to increased slippage and volatility, driving users into the arms of CEXs like Binance and Coinbase. That said, recent innovations have seen substantial strides made.

DeFi liquidity aggregators, for example, combine liquidity from various decentralized exchanges (DEXs) into single orderbooks, reducing slippage for popular trading pairs and sometimes even surpassing the depth available on CEXs.

Moreover, the emergence of dedicated liquidity layers has made onchain trading a more attractive proposition – and not just due to the deepened liquidity. Venues like Layer-3 (L3) blockchain Orbs have been at the forefront of the trend, offering users aggregated liquidity, advanced trading orders, and decentralized derivatives – a package enabling a permissionless trading experience coupled with CeFi-tier UX. 

Interestingly, Orbs was actually designed specifically for advanced onchain trading, furnishing users with sophisticated tools more commonly associated with CEXs.

Useability

Historically, the complexity of onchain trading platforms has hindered adoption. And while it’s true the learning curve remains steeper than that of CEXs, major investments in interface design have simplified onboarding and reduced complexity over the last 18 months.

Innovations like seedless wallets, onchain trading bots and account abstraction (enabled by standards like ERC 4337) have streamlined UX, allowing dApps to subsidize gas fees and facilitate trading even when users aren’t holding the native network token.

Fiat Support

CEXs were among the first to offer customers fiat integrations, enabling them to fund their trading accounts with fiat and even cash out to their local currency. The integration of fiat on/off ramps appeared to load the deck, confining onchain trading to the far reaches of the cryptosphere and preserving the dominance of digital asset exchanges.

But fiat integration has become the rule rather than the exception. Today, the majority of web3 wallets offer built-in fiat-to-crypto conversion, and the same is true of many DeFi protocols and crypto-friendly banking apps. 

Although most DEXs continue to support crypto-to-crypto trading pairs, fiat connectivity is in a different league compared to even a few years ago: acquiring crypto via debit card or bank transfer is no longer a head-scratcher.

Advanced Trading

Of course, not all traders are alike: some prefer to trade derivatives contracts (futures and options) while others stick to spot trading. Traditionally, CEXs have captured the custom of the former demographic although DeFi platforms have started closing the gap. 

In part, this is due to the flight to Layer-2 solutions and the consequent drop in fees, making trading perps onchain much more palatable. Several perp trading platforms (dYdX, Drift, Perpetual Protocol) have come to the fore, each granting traders the ability to make leveraged trades without depending on a centralized intermediary. 

Amazingly, the average daily trading volume for crypto derivatives has skyrocketed from $1.8 billion in 2023 to $5 billion this year.

For the Many, Not the Few

While there’s still work to be done to deepen liquidity and reduce complexity, onchain trading is no longer the preserve of a select few. If the aforementioned benefits of trading onchain outweigh the negatives, it might be time to put your CEX account on the backburner.