The cryptocurrency market is still dominated by centralized exchanges. However, centralized trading platforms face many real-world challenges, such as vulnerability to hacking and slow responses to unusual blockchain events like hard forks. Additionally, due to regulatory gaps, these exchanges often lack transparency in information disclosure, creating significant security risks related to the storage and custody of user data, funds, and private keys.
Decentralized exchanges, commonly referred to as DEXs, aim to address these issues by establishing peer-to-peer markets directly on the blockchain. This allows traders to retain ownership of their funds. DEXs offer advantages such as user autonomy, data transparency, enhanced privacy, and real-time settlement—features that are increasingly attracting attention.
Many centralized exchanges are now shifting toward decentralization. The ideal model for a DEX is a Decentralized Autonomous Organization (DAO), which ensures that decision-making power lies with the community rather than a central authority. Binance DEX is a prominent example of this effort. The platform has invested heavily in developing its own public blockchain and rebuilding its DEX to achieve decentralization and community governance.
From announcing the development of its proprietary blockchain and DEX in March 2018 to launching the test version of Binance DEX in February 2019 and going live with the mainnet in April, Binance accomplished this three-stage leap in just over a year. The speed and efficiency of this development were impressive, but underlying concerns remain.
As a major beneficiary of the centralized exchange model, is Binance truly willing to disrupt itself? Many industry experts argue that while Binance may achieve technical and commercial decentralization, Binance DEX remains an extension of its centralized exchange. Whether due to vested interests or operational requirements, it does not achieve decentralization in a substantive sense.
Binance's Strategic Vision
"Decentralized exchanges are not replacements for centralized ones; they serve as important supplements, with both models complementing each other," stated Sun Bo, a researcher at a blockchain institute.
He added, "Traders have diverse needs. Centralized exchanges offer high efficiency for users prioritizing speed, while decentralized exchanges cater to those emphasizing privacy and security. A holistic exchange ecosystem must incorporate both."
Chen Yihan, a technical lead at another exchange, highlighted that Binance DEX has different objectives compared to other decentralized exchanges. "Other DEXs aim to replace centralized platforms, but Binance certainly does not seek to disrupt itself."
As emphasized by Binance co-founder He Yi, one of the biggest advantages Binance DEX holds over competitors is the vast user base accumulated by Binance over the years.
Beyond this, Chen Yihan pointed out that Binance has deeper strategic considerations. After Binance DEX officially launched, mainstream cryptocurrency trading sections were replaced primarily with BNB trading pairs. On June 17, Binance announced the launch of Bitcoin-pegged tokens (BTCB) on its blockchain, with plans to introduce more tokens tied to other major cryptocurrencies. "This move aims to reduce the influence of cryptocurrencies like BTC and ETH while expanding the utility and value of BNB," he explained.
"Exchanges launching DEXs are essentially competing for the second position—since Bitcoin's dominance is unchallenged, other cryptocurrencies are replaceable in the eyes of exchanges. If a token gains significant trading demand and application scenarios, it has the potential to become a mainstream cryptocurrency. This is part of Binance’s motivation behind promoting BNB," he noted.
While the Cosmos cross-chain protocol has compatibility issues with older technical protocols like BTC, ETH, and EOS, it works well with newer ones. Binance’s strategy involves leveraging its influence to attract projects to migrate to Cosmos, thereby increasing its control and sway over these projects. Unlike Ethereum, Cosmos does not support smart contracts, meaning users cannot add custom logic to the chain. This design enhances underlying security.
"For a public blockchain aspiring to host diverse ecosystems, the lack of smart contracts limits possibilities and may even disqualify it from being considered a true public chain. However, for Binance Chain, which focuses on DEX functionality, this trade-off reinforces security," Sun Bo commented.
Chen Yihan also revealed that other major exchanges are developing their own blockchains and DEXs based on Cosmos. As more exchanges shift their focus, the influence of established chains like Ethereum and EOS may diminish. For exchanges, a more mature ecosystem strengthens their market position and increases the value of their native tokens.
The Conflict Between Trust Enhancement and Trustlessness
"Binance’s biggest advantage is the brand endorsement from its centralized exchange," stated Sun Bo.
In his view, decentralization in DEXs can be evaluated across three dimensions: physical deployment, application logic, and community governance. Only when all three are decentralized can a platform be considered a true DEX. Currently, Binance remains centralized in both technical deployment and governance.
"Binance provides trust enhancement through its brand, but a fully decentralized exchange should inherently be trustless. This creates a fundamental contradiction," he pointed out.
Chen Yihan expressed similar concerns, noting that Binance’s node governance is a clear example of operational centralization. Binance co-founder and CMO He Yi previously explained that Binance DEX nodes are divided into regular nodes and validator nodes. While regular nodes have no entry barriers, validator nodes participate in major decision-making processes. Initially, there were 11 validator nodes, jointly managed by Binance and community participants.
However, He Yi mentioned that the initial election of these validators was conducted by Binance. Specific details about the validators and the election criteria were not disclosed. According to available information, Binance has yet to formalize a transparent validator selection process.
This lack of transparency has led many industry experts to question its adherence to decentralized principles. "This represents institutional centralization. Without disclosing node details, it is hard to believe the system is sufficiently transparent and fair," Sun Bo remarked.
Chen Yihan added that the degree of centralization cannot be judged solely by the number of nodes. "Since Binance Chain uses a Proof-of-Stake (POS) consensus mechanism, centralization depends on the distribution of the native token. BNB was issued by Binance, which remains the largest holder, so centralization is predictable."
Beyond node governance, Binance DEX also demonstrates centralized management in its rule-making.
In early June 2019, Binance announced that its DEX website would block users from 29 countries. It further warned that starting July 1, users from these regions would lose access to the website and wallet interface.
This geographical blocking raised doubts about the platform’s decentralization claims. In response, Binance CEO Changpeng Zhao clarified that Binance DEX itself does not block users—it is the Binance.org website that restricts access. He emphasized that the blockchain is maintained by numerous nodes globally and cannot be blocked.
However, according to the Terms of Service published on April 25, Binance retains significant control over the platform’s operations.
Section 6.9 states that Binance can prohibit users at its discretion if it determines they have engaged in prohibited activities. Section 7.0, covering anti-money laundering (AML) and counter-terrorism financing (CTF), grants Binance the authority to monitor transactions and report to international regulators. It also reserves the right to terminate user wallets and applications without notice.
Additionally, the terms highlight that Binance can delist projects without user consent or prior notification.
In essence, Binance maintains management control over user accounts and holds decision-making power regarding token listings. The incorporation of KYC (Know Your Customer) and AML measures further aligns it with traditional centralized exchanges.
"Most existing DEXs have not implemented KYC/AML mechanisms due to their small trading volumes—approximately 1% of traditional exchanges—which attracts less regulatory attention. However, larger exchanges venturing into DEXs might face accusations related to money laundering. Implementing KYC/AML at the wallet registration level or designing such mechanisms into the blockchain itself is possible," Sun Bo noted.
Regulatory Challenges
On November 8, 2018, the U.S. Securities and Exchange Commission (SEC) penalized Zachary Coburn, founder of the decentralized exchange EtherDelta, for operating an unregistered national securities exchange.
"The main issue with EtherDelta was that its founder absconded, causing investor losses. While DEXs face less regulatory pressure than centralized exchanges, they are not immune to compliance challenges," Sun Bo commented.
Regulatory frameworks for centralized exchanges are still evolving globally. Due to their smaller scale and higher technical barriers, DEXs currently pose lower financial risks and have a more limited impact than their centralized counterparts.
"From a regulatory perspective, centralized exchanges take priority over DEXs. However, there may be little difference in legal liability—especially for platforms like Binance DEX, where a clear responsible entity exists. If issues arise, Binance would be the first liable party, just as with a centralized exchange," Chen Yihan explained.
On November 1, 2018, the Hong Kong Securities and Futures Commission (SFC) issued a statement emphasizing that virtual asset trading activities should be conducted under a single legal entity. The statement further clarified that platforms must ensure all activities promoted to Hong Kong investors are licensed by the SFC.
"From a regulatory standpoint, decentralized exchanges cannot operate outside the law," Chen Yihan concluded.
As discussed in an article by Yao Qian, former director of the Digital Currency Research Institute at the People’s Bank of China, decentralized asset trading offers advantages such as low cost, near-instant settlement, and system robustness. However, challenges remain in scalability, security, privacy protection, regulatory integration, and application exploration. Crucially, incorporating "regulatory access points" should be an essential component of any decentralized trading technology solution.
Frequently Asked Questions
What is a decentralized exchange (DEX)?
A decentralized exchange operates on a blockchain, allowing peer-to-peer trading without intermediaries. Users retain control of their funds, enhancing security and privacy compared to centralized platforms.
How does Binance DEX differ from other DEXs?
Binance DEX leverages Binance's existing user base and brand reputation. However, it incorporates centralized elements like node governance and KYC/AML measures, which many purely decentralized platforms avoid.
Why are regulatory compliance measures important for DEXs?
As DEXs grow, regulators are increasing scrutiny to prevent illegal activities like money laundering. Compliance measures, such as KYC/AML, help platforms operate within legal frameworks and protect users.
Can a DEX be fully decentralized?
Full decentralization requires distributing control across technical infrastructure, governance, and community oversight. Most existing DEXs, including Binance DEX, exhibit centralized features in at least one of these areas.
What are the risks of using a DEX?
Risks include smart contract vulnerabilities, low liquidity, and regulatory uncertainty. Users should research platforms thoroughly and consider using secure trading tools to mitigate risks.
How do node governance structures impact decentralization?
If a few entities control validator nodes or governance decisions, the system becomes centralized. Transparent and distributed node ownership is essential for true decentralization.
Note: The names Sun Bo and Chen Yihan are pseudonyms, as requested by the interviewees.