Cryptocurrency exchanges allow users to buy, sell, and trade cryptocurrencies. They are an essential part of the cryptocurrency ecosystem and provide a vital service to users.
There are two types of cryptocurrency exchanges: Centralization vs. Decentralization. Centralized exchanges operate like traditional stock exchanges and do not allow users to control their private keys. It is a major security concern because users don’t have access to their funds if they lose access to their computers or mobile devices.
Decentralized exchanges operate without a third party, allowing users to control their funds at all times by storing them in an offline wallet on their computer network or mobile device.
So, which type of exchange is better? Centralization vs. Decentralization? The answer is more complex and depends on several factors. Keep reading to learn more about the pros and cons of centralized and decentralized cryptocurrency exchanges!
What Is A Cryptocurrency Exchange?
A cryptocurrency exchange is an online platform for buying, selling, and trading cryptocurrencies. Bitcoin and other cryptocurrencies are digital assets that a central authority or bank does not control. They are stored in digital wallets, known as “wallets,” and in hot wallet (online) storage.
Cryptocurrency exchanges serve as the marketplace where buyers and sellers agree on the price of bitcoin (BTC) at which they will trade. The cost is determined by supply and demand so it can change over time. For example, if most people want to buy bitcoin and then sell it, its value increases. If fewer people want to buy bitcoin than sell it, its value decreases.
Exchanges are also responsible for storing users’ funds in online wallets or cold storage, which means they do not hold users’ funds directly themselves but rather provide an interface that allows users to send funds to one another through their private keys to perform transactions.
What Is a Centralized Cryptocurrency Exchange?
With a centralized system, there is a formal chain of command to follow when making decisions that will impact the organization. Power and authority may no longer come from a single source of control. The centralized governance system is the most commonly used platform globally.
A crypto exchange run by a company is centralized. These exchanges are centralized due to one organization’s rules and regulations that manage all transactions and set the exchange’s fees.
For example, popular CEXes like Crypto.com, Coinbase, and FTX are run for profit. The companies generate revenue from people using their exchanges to buy or sell cryptocurrencies. Their platforms are browser-based, and they also have mobile apps.
To start, you must create an account, verify your identification, and link a funding source, such as a bank account or debit card. Afterward, you can buy, sell, or trade with any crypto supported by the exchange. Additionally, some platforms allow you to lend your cryptocurrency or stake it to earn interest. You can get help from customer support staff if you have trouble.
CEXs are different from DEXs in that they have custodial crypto wallets. Essentially, the company does not provide you with access to the private keys that allow you to directly control your crypto. The login information for your account is all you need.
What is a Decentralized Crypto Exchange?
Decentralization refers to making decisions at multiple levels within a government institution. Companies with decentralized control tend to have a segmented ruling method.
A decentralized exchange facilitates crypto trades via an automated program. There is the possibility of someone or a group setting up and overseeing the development of a DEX. The platform is managed by a decentralized network of computers, making it possible to establish a platform without any single entity controlling it.
Cryptos associated with the exchange may be held by the creators and those in charge of running it (its “native” token). The token might increase in value if the exchange becomes more popular, as it might allow users to vote on changes to the platform.
The centralized crypto exchange does not require you to register before you can use it. Instead, you connect your crypto wallet through DEX’s online app. DEX will automatically process your order after you buy or sell cryptos.
A DEX typically supports various cryptocurrencies, including new ones not found on a CEX. In most cases, DEXes do not support dollar-to-crypto trades. So, you must add funds to your crypto wallet before using one. There are (decentralized crypto exchanges) CEXs that allow you to buy crypto and DEXes that offer an “on-ramp” tool. You might also need help directly exchanging Bitcoin for Ethereum on DEXes since many support only one blockchain.
DEXs also offer less customer support or any at all. People are often scammed by scammers pretending to be from customer support, then tricked into sharing their crypto wallet information, allowing them to steal funds. A DEX hack or a crypto scam may leave you with no recourse if you use the DEX to buy crypto.
How does a Decentralized Cryptocurrency Exchange work?
A DEX functions when a client brings their cryptocurrency to the gate. The gateways stores an equivalent amount of the currency and gives digital tokens that act as a stand-in to the original owner. The client now has access to this exchange’s blockchain with these tokens. The cryptocurrency pledged as collateral for these tokens is the real currency.
You can exchange the tokens you currently hold for another kind of token. These places are notable for their use of blockchain technology to protect your order, the matching process, and all subsequent processes. You can also convert tokens that you receive through transactions into real cryptocurrency.
Centralized vs. Decentralized Crypto Exchanges
To better understand the differences between these two exchanges, let’s take a closer look:
A decentralized exchange offers more protection than a centralized exchange. Trading with centralized crypto exchanges entails a risk of hackers. A hacker could steal all your funds if they gain access to the private keys used by the third party.
The centralized exchanges are working hard to make their clients more secure after several such incidents have occurred. A decentralized exchange eliminates the risk of hackers attacking and stealing funds.
Because DEX gates are not centralized, multiple users cannot lose their funds due to a single cause. Some centralized exchanges are offering decentralized accounts in an attempt to counteract the security problem.
Crypto exchanges that are centralized retain most of their control over accounts from a third party. A decentralized exchange, on the other hand, lets you control your account completely. The popularity of decentralized exchanges is also due to this reason. These platforms also have a higher degree of complexity.
As a result of their popularity, centralized cryptocurrency exchanges have a greater market share than decentralized ones. The advantages of decentralized exchanges are their wallets and accounts, but they are less popular. Therefore, centralized exchanges provide better liquidity and are more stable than decentralized exchanges.
In the future, more decentralized exchanges are expected to enter the market, increasing their popularity significantly. Many organizations, such as Binance, are launching DEXes.
A centralized exchange has more features than a decentralized exchange. The option to trade on margin, use portfolio management tools, and use advanced order types is available. A decentralized crypto exchange has a limited range of orders and does not provide margin trading. A decentralized platform with more advanced features might enter the market.
A centralized platform charges its users for its services. The fees for these services vary depending on which features a provider offers. Blockchain matching orders at decentralized exchanges are usually free or very inexpensive.
In contrast to decentralized exchanges, centralized ones are easier to regulate. Centralized platforms must get licenses and adhere to local regulations.
Since their distributed blockchain makes it highly difficult to regulate them, decentralized exchanges differ from centralized ones. A decentralized exchange can still operate in regions where governments ban crypto exchanges.
Centralized platforms are faster than decentralized ones. According to an analysis, centralized cryptocurrency exchanges execute orders in 10 milliseconds, whereas decentralized exchanges match and fill orders in 15 seconds or less. A decentralized exchange can also process an order in a minute, much longer than a centralized exchange.
Compared to decentralized exchanges, centralized exchanges are more liquid since multiple users place orders at different times according to market trends. As a result, various users will buy and sell assets if they are in demand. Additionally, its market makers provide liquidity.
Platforms that use decentralized order matching are more liquid than centralized order matching. It is also due to their low popularity that they are so unpopular.
What are the advantages and disadvantages associated with CEXs?
There are several pros and cons associated with CEXs, especially among beginners:
Pros of a Centralized Crypto Exchange
- User interfaces are often simple and easy to use
- Regulations and laws are generally followed
- If you forget your login credentials, this service may be able to assist you
- It is possible to own insurance that protects crypto from hackers
Cons of a Centralized Crypto Exchange
- To keep your crypto safe, you must trust the company
- You can buy cryptos from exchanges if they list them
- Login information stolen by someone might not be reimbursed
- Your account might be frozen, or the exchange may suspend certain cryptos
What are the advantages and disadvantages associated with DEXs?
There are several pros and cons associated with DEXs, as follows.
Benefits of a Decentralized Crypto Exchange
- Your cryptos are completely under your control
- CEXes do not list all cryptos on their exchanges
- No account or identity verification required
- It could be cheaper than a CEX in terms of transaction fees
Drawbacks of a Decentralized Crypto Exchange
- A transaction fee may be added to each transaction
- Using and navigating this site might be more challenging
- A hack of the DEX may result in you losing your money
- The issue might be left to you if it arises
Which type of cryptocurrency exchange is right for you?
A centralized exchange is the best place for most crypto traders and investors to start. Buying and trading cryptos can be easier with intuitive interfaces, customer support, and safety measures. Centralized exchanges are also more secure than decentralized exchanges, which are prone to hacking attacks.
The centralized crypto exchange is the type of cryptocurrency exchange that is most centralized and controlled. The platform has the most control over the order book and executes orders in milliseconds. The platform also offers high liquidity and provides a variety of features. However, the centralized nature of this type of exchange makes it easy to regulate and requires a license from authorities.