In this article, we’ll discuss the topic of centralized vs decentralized cryptocurrency exchanges to find out which one is better. We’ll consider the various distinctions present between these two types to make sure you don’t have any doubts.
To trade cryptocurrencies, you’d have to use a cryptocurrency exchange. But did you know there are two kinds of crypto exchanges? They are, namely, centralized and decentralized cryptocurrency
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What is a Cryptocurrency Exchange?
Before we begin discussing the topic of centralized vs decentralized cryptocurrency exchanges, we should first understand what a cryptocurrency exchange is.
They refer to places where you can buy or sell crypto. Every crypto exchange has its unique rules and regulations, but they all provide you access to the most prevalent cryptocurrencies.
These exchanges are mainly of two kinds:
In the next sections, we’ll discuss each one of these kinds of exchanges in detail.
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What is a Centralized Cryptocurrency Exchange?
A centralized cryptocurrency exchange is a platform where you can buy or sell digital assets. Here, you have to trust a third party to monitor the transaction and secure the assets on behalf of the buyer and the seller. Their deals aren’t tracked on the blockchain. Such exchanges require you to submit your personal information for verification. On the other hand, if you’re a company, then you’d have to provide your corporate information to the exchange so it can verify your account.
The more details you provide to these exchanges, the higher your withdrawal quota will increase. Verified users of these platforms can contact the support team of the exchange in case of any technical error or if they lose their password.
In most cases, centralized crypto exchanges provide their users with flat pairs at stable prices. These exchanges are widely popular among cryptocurrency users, and you can easily find one of these platforms online. Some examples of centralized cryptocurrency exchanges include Binance, Coinbase, LocalBitcoins, and others.
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What is a Decentralized Cryptocurrency Exchange?
A DEx or a decentralized cryptocurrency exchange is similar to a centralized one, except it doesn’t have a third party on which you can rely. All of the funds in this exchange remain stored on the blockchain.
These platforms allow peer-to-peer (P2P) trading for which it uses assets, proxy tokens, or an escrow system, unlike the IOU-based system a centralized crypto exchange uses.
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How does a Decentralized Cryptocurrency Exchange work?
In a DEx, the client (you) brings his/her cryptocurrency to the gate, which stores the same and gives the client proxy tokens in their place. The client can now use these tokens within the blockchain of this exchange. The real cryptocurrency present in the gates collateralizes these tokens.
You can order to sell your current tokens for another kind of tokens in exchange. Your order, its matching process, and all the consequent processes remain stored on the blockchain of the exchange, which is the first highlight of these places. When you receive any tokens through a transaction, you can convert them into real cryptocurrency as well.
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Centralized vs Decentralized Cryptocurrency Exchanges
Here’s a quick look at centralized vs decentralized cryptocurrency exchanges:
|Centralized Crypto Exchange||Decentralized Crypto Exchange|
|Control||The platform has the most control||User has the most control|
|Security||Risk of hackers||No chance of hacking or other dangers|
|Popularity||Highly popular||Not very popular|
|Fees||Charges fees for using the platform||Charges zero or very minimal fees|
|Features||Provides a variety of features||Very few features available|
|Regulation||Easy to regulate, requires license from authorities||Complicated to regulate; doesn’t require a license|
|Liquidity||High Liquidity||Low Liquidity|
|Speed||Executes orders in milliseconds||Can take up to a minute to execute orders|
Below is a detailed look at the difference between both of these exchanges so you can understand the distinctions better:
In a centralized crypto exchange, most of the control over your account remains in the hands of the third party which runs the exchange. On the other hand, with a decentralized exchange, all the control of the account remains with you.
This is another prominent reason why decentralized exchanges are becoming popular. But it’s also responsible for the enhanced complexity of such platforms.
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Decentralized exchanges offer more protection than centralized exchanges. A considerable risk of trading with centralized crypto exchanges is of hackers. They can hack the third party which uses private keys to access all the funds of the users, and you could lose all of your deposit.
Several such incidents have occurred previously, and centralized exchanges put a lot of effort into making themselves more secure for their clients. With a decentralized exchange, there’s no risk of hacking and losing one’s funds due to such activities.
Decentralized platforms are more secure because there’s no possibility of multiple users losing their funds due to a single cause unless it’s related to the DEx gates.
To counter the security problem, some centralized exchanges have started offering decentralized accounts to their customers.
Currently, Centralized crypto exchanges are more popular than the decentralized ones because they entered the market first. Even though decentralized exchanges have peculiar advantages over their centralized counterparts in wallets and accounts, they are far behind in popularity. That’s because centralized exchanges offer better infrastructure and liquidity.
However, as more decentralized exchanges enter the market, their popularity will increase considerably. Many organizations are focused on launching DExes in the market, such as Binance’s decentralized exchange.
Centralized platforms impose charges on their users for their services. These fees vary from provider to provider according to the features one provides. Decentralized exchanges either have zero charges or very minimal charges for matching orders on the blockchain.
In terms of features, centralized crypto exchanges have the edge over decentralized ones. You can perform margin trading, use portfolio management tools, and use multiple advanced order types to trade better.
Decentralized crypto exchanges have quite limited types of orders and don’t offer margin trading (and similar features) to their customers. Maybe when more advanced decentralized platforms enter the market, they might provide better features.
It is easier to regulate centralized exchanges than decentralized ones. Centralized platforms require licenses and have to adhere to the rules of the local regulatory authority of their region.
In contrast to centralized exchanges, decentralized ones don’t have regulation because it’s highly challenging to do so thanks to their distributed blockchain. This means if a government bans crypto exchanges, decentralized ones can still operate in those regions.
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Centralized cryptocurrency exchanges have more liquidity because multiple users make particular orders according to market trends. So if an asset is in demand, various users will purchase or sell it accordingly. Moreover, it has market makers who add further liquidity to the platform.
Decentralized platforms don’t have as much liquidity as centralized platforms have because they order matching takes time. Another prominent reason is their low popularity.
Decentralized platforms are slower than centralized ones. According to an analysis, centralized crypto exchanges take an average of 10 milliseconds to execute orders whereas a decentralized exchange takes minimum 15 seconds to match and fill an order. Besides, a decentralized exchange can take up to one minute to complete an order, which is a considerable amount of time in comparison to its centralized counterpart.
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Learn More About Cryptocurrencies and Blockchain
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Why is a decentralized cryptocurrency important?
The importance of a decentralized cryptocurrency is that it allows for a trustless value exchange system. This is accomplished by removing the necessity for a third party to validate the value transfer. This eliminates the need for an intermediary and allows two people to exchange value directly. It also makes the system more secure because there is no single point of failure. Similarly, because a single body does not control the currency, it allows for a more democratic system. It also provides a more efficient system because a central authority does not manage the money.
What are the risks of a decentralized cryptocurrency?
Cryptocurrencies are decentralized, meaning they are not governed or regulated by a single governing body or authority. This also means that if something goes wrong with a bitcoin transaction or if someone loses money, there is no one to turn to. Cryptocurrencies are also vulnerable to cybercrime and hacking because they are digital rather than physical. They're also quite volatile, with a high value one day and a low value the next. Similarly, global events such as natural disasters or political instability can affect the value of a cryptocurrency.
When will the price of a decentralized cryptocurrency fall?
A lot of factors have contributed to the decline in bitcoin values. Regulatory uncertainty is one of the main factors. Many countries are still unsure how to regulate the bitcoin sector, producing significant market instability. As a result, prices are falling. The lack of adoption is another factor for the price drop. Cryptocurrencies are still not extensively used, and many merchants refuse to accept them. This is producing a lack of interest in the market, forcing prices to plummet. The hacking of cryptocurrency exchanges is another factor for the price drop. Many exchanges have been hacked in the past, causing a great deal of market confusion. As a result, prices are falling. The price drop can also be attributed to the volatility of cryptocurrencies.