Centralized vs. Decentralized Exchanges: Which is Better?
Centralized cryptocurrency exchanges have long been considered the standard in cryptocurrency financing. But with the recent emergence of decentralized cryptocurrency exchanges, many cryptocurrency investors are asking: which is better?
There are two main types of cryptocurrency exchanges: centralized and decentralized. Both centralized and decentralized exchanges come with their own advantages and disadvantages. In this article, we’ll define both types as well as the pros and cons of using each for investing in and trading cryptocurrency.
Centralized vs. Decentralized Exchanges
Each has its own advantages and disadvantages, so it's important to understand the difference before choosing one. In this post, we'll explore the key differences between these two exchange types. We'll also look at some of the pros and cons of each option, so you can decide which is right for you.
Centralized Cryptocurrency Exchange
A centralized exchange (CEX) refers to a third party that monitors and secures cryptocurrency transactions on behalf of its users. As of today, most cryptocurrency transactions go through a centralized exchange as they offer greater reliability. Some popular examples of centralized exchanges are Coinbase, Binance, Kraken, and Gemini.
Centralized exchanges tend to be attractive options for beginners to use since they are more user-friendly and offer a higher level of reliability. However, since these exchanges are controlled entirely by companies that are responsible for their users’ holdings, they can be susceptible to hacking. This was proven when Mt. Gox suffered a massive hack that resulted in $460 million in bitcoins being stolen back in 2014.
- Easier for beginners
- Reliable – require users to verify their personal information via a developed platform
- Regulated and compliant with government requirements
- Transactions are fast and convenient
- Transaction fees
- Susceptible to hacking and cybersecurity risks
Decentralized Cryptocurrency Exchange
A decentralized exchange (DEX) allows users to execute peer-to-peer transactions without third-party intervention. All the funds in these exchanges are stored on the blockchain, which eliminates the need for a third-party company to track and manage cryptocurrency. Some examples of decentralized exchanges are Venus, Barterdex, and AirSwap.
This type of exchange is typically appealing to users who don’t want their transactions to go through an outside company. They offer a more flexible option, but since they are still a newer type of exchange, they are typically not as user-friendly as the more popular centralized cryptocurrency exchanges.
- No risk of hacking
- Privacy – users remain anonymous
- Protection from cryptocurrency market manipulation
- Not beginner-friendly – typically do not provide an easy-to-understand user interface
- Low liquidity since only around 1% of cryptocurrency investors use these exchanges
- No fiat payments
- No method for recovering passwords
Clearly, these two types of cryptocurrency exchanges are very different. Let’s take a look at the most important distinctions between CEX and DEX platforms.
CEXs are a vastly more popular option, and they leverage their reputation to boost confidence in their platform. They are considered a more reliable option for users as they have a lower barrier of entry, easy-to-understand interfaces, and a trusted name. DEXs, on the other hand, offer complete control over your funds and protection from third-party influence, which is very appealing for some users.
While DEXs provide security in terms of preventing market manipulation, CEXs provide more traditional forms of security in the form of regulatory compliance. This compliance usually comes in the form of Know Your Customer verification, which can upset cryptocurrency users who wish to remain anonymous.
Compared to DEXs, CEXs offer much higher liquidity. This is due in part to the inability to purchase cryptocurrency with fiat currency on DEXs, so users must first purchase via a CEX.
There are typically no fees or very minimal fees in the case of DEXs, while most CEXs charge fees for carrying out any transaction made on the platform. For example, one of the most popular CEXs, Binance, charges a fee of .012% to .1% depending on the type of transaction.
CEXs need licenses to operate and must be compliant with the regulatory authorities. DEXs, on the other hand, do not require a license and are much more difficult to regulate due to the distributed blockchain.
Which type of exchange is better?
As you can see, there are many differences between centralized and decentralized exchanges. While many users prefer centralized exchanges due to their reliability and popularity, there are quite a few users who enjoy the security, anonymity, and low cost of decentralized exchanges. Each type offers its own pros and cons, so depending on your particular goals and circumstances, you may consider using both.
If you want full control over your assets without outside influence or you wish to remain anonymous, a decentralized exchange may be better for you. However, if you’re a beginner who simply wants a convenient, trusted platform to start making your cryptocurrency transactions on, you’ll probably want to look into using a centralized exchange instead.
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