Centralized vs. Decentralized Cryptocurrency Exchanges
Centralized cryptocurrency exchanges act as a third-party between a buyer and a seller. Since they are operated and controlled by a company, centralized exchanges offer more reliability. Approximately 99% of all crypto transactions go through centralized exchanges. Examples of centralized cryptocurrency exchanges include:
- Coinbase
- Kraken
- Gemini
Decentralized cryptocurrency exchanges (DEX) allow users to execute peer-to-peer transactions without needing a third party or an intermediary. Due to some of the issues associated with centralized exchanges, decentralized exchanges are preferred by some users.
However, decentralized exchanges do not facilitate the trading of fiat currencies for cryptocurrencies. Examples of decentralized cryptocurrency exchanges include:
- AirSwap
- Barterdex
- Blocknet
Advantages of Centralized Cryptocurrency Exchanges
User-friendly
Centralized exchanges offer beginner investors a familiar, friendly way of trading and investing in cryptocurrencies. Instead of using crypto wallets and peer-to-peer transactions, which can be complex, users of centralized exchanges can log into their accounts, view their account balances, and make transactions through applications and websites.
Reliable
Centralized exchanges offer an extra layer of security and reliability when it comes to transactions and trading. By facilitating the transaction through a developed, centralized platform, centralized exchanges offer higher levels of comfort.
Disadvantages of Centralized Cryptocurrency Exchanges
Hacking risk
Centralized exchanges are operated by companies that are responsible for the holdings of their customers. Large exchanges usually hold billions of dollars worth of bitcoin, making them a target for hackers and theft.
An example of such an incident is Mt.Gox, which was once the world’s largest cryptocurrency exchange company before it reported the theft of 850,000 bitcoins, leading to its suspension.
Transaction fees
Unlike peer-to-peer transactions, centralized exchanges often charge high transaction fees for their services and convenience, especially when trading in large amounts.
Advantages of Decentralized Cryptocurrency Exchanges
Mitigating hacking risk
Users of decentralized exchanges do not need to transfer their assets to a third party. Therefore, there is no risk of a company or organization being hacked, and users are assured of more excellent safety from hacking and theft.
Preventing market manipulation
Due to their nature of allowing for the peer-to-peer exchange of cryptocurrencies, decentralized exchanges prevent market manipulation, protecting users from fake trading and wash trading.
Anonymity
Decentralized exchanges do not require customers to fill out know-your-customer (KYC) forms, offering privacy and anonymity to users.
Disadvantages of Decentralized Cryptocurrency Exchanges
Complexity
Users of decentralized exchanges must remember the keys and passwords to their crypto wallets, or their assets are lost forever and cannot be recovered. Unlike centralized exchanges, they require the user to learn and get familiar with the platform and the process, which offers a more convenient and user-friendly operation.
Lack of fiat payments
Decentralized exchanges do not allow for trading fiat currencies for digital ones, making them less convenient for users who do not already hold cryptocurrencies.
Liquidity struggles
Some 99% of crypto transactions are facilitated by centralized exchanges, which suggests that they are accountable for most of the trading volume. Due to the lack of volume, decentralized exchanges often lack liquidity, and it can be challenging to find buyers and sellers when trading volumes are low.
In summary, centralized and decentralized exchanges will co-exist as they each provide their unique benefits. Also, we can go even one step further by stating that centralized exchanges will continue to play a critical role in the cryptocurrency ecosystem because they offer fiat on/off-ramps. This option is one function that fully decentralized exchanges, by definition, do not allow.
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