Okay, so you’re thinking about investing in some cryptocurrency and exchange cryptocurrency on desktop, or maybe you’re trying to figure out which exchange to use. Have you heard of the decentralized vs. centralized exchange debate? It’s all the rage in the cryptocurrency world. Let’s break it down.
Since the advent of cryptocurrency in 2009, all trading of digital assets has been done exclusively through centralized exchanges (CEX). The first decentralized (DEX) cryptocurrency exchanges only appeared in 2014, but only some people used them then.
Centralized exchanges
Centralized (CEX) exchanges are centrally managed exchanges that mediate cryptocurrency trading.
They are trading platforms where all transactions are handled by their servers. The exchange fully controls the user account, all user data, and the wallet. The management is responsible for the user’s confidential data, keeps the trading history, controls the operation of the exchange, and makes all decisions about the project’s development unilaterally.
In other words, these platforms are similar to regular stock exchanges in everything, except that they primarily trade cryptocurrency assets rather than securities.
What CEX users can do:
- Create accounts and hold funds in an exchange wallet;
- Make transactions involving cryptocurrencies, which are processed by the exchange servers;
- Conduct trade futures, engage in margin and automated trading, etc.
- Verification of users is obligatory. Management is implemented from a single center: control of exchange transactions, security of funds, maintenance – all this is the exchange’s responsibility.
Centralized exchanges are governed by specific legal entities responsible for the trading floor’s operation, preservation of user funds and compliance with the law.
The management of centralized exchanges has access to customer funds.
If necessary, the management of a centralized exchange can block an individual user, a specific transaction or an entire line of business – such as depositing or withdrawing funds. In addition, every new user who registers on CEX must undergo a verification of identity (KYC) procedure.
Pros and cons of CEX
Using centralized exchanges is relatively easy even for beginners in cryptocurrency investments. Such resources provide brokerage services and guarantee the participant a certain level of security.
Among the main advantages of CEX:
- wide functionality;
- large selection of currency pairs;
- the possibility of buying coins for fiat.
Then the minuses begin, concerning the most important moment – management. If desired, a centralized exchange can block any user’s account, and with it the wallet.
In addition, user data stored on the server is vulnerable to hacker attacks. It is difficult to calculate how much assets have been irretrievably lost due to the hacking of centralized exchanges in recent years.
More cons:
- there is no anonymity – each user is identified;
- transaction limits depend on the user’s status;
- the exchange administration may set asset prices at its discretion;
- at any time, the exchange may close for various reasons, including if it is impossible to cover losses from transactions.
- Privacy and other advantages of digital assets are leveled or completely reset when using CEX. We are dealing with ordinary stock exchanges adapted to the crypt.
Decentralized exchanges
Decentralised (DEX) refers to automated blockchain-based exchanges with decentralized management. Trading operations are based on smart contracts.
The functionality of a decentralized exchange is designed to find a match for requests to buy/sell cryptocurrencies.
Distributed ledger technology eliminates the management of the wallet by anyone but the user. Participants make transactions without intermediaries, but directly with each other.
What users are offered DEX:
- The wallet and account are controlled only by the user – even if you create a vault on an exchange, it belongs only to you and cannot be blocked or limited in functionality;
- All trades are based on smart contracts (or swaps) and are processed on the blockchain – if you create an order and another user responds to it, it is technically impossible to cancel or stop the process;
- The exchange does not mediate;
- No user verification is needed – the user remains completely anonymous.
Pros and cons of DEX
Distributed exchanges are the complete opposite of CEX. There is no central regulatory authority, and transactions occur directly between the two parties. It’s faster, safer, and cheaper. There are no servers for data processing.
Other advantages:
- complete anonymity of users – they do not go through the KYC process;
- government agencies or other regulators cannot close DEX – physically such resources are not in anyone’s jurisdiction;
- the exchange does not have access to user accounts and wallets;
- security – since the data is not stored on servers, it is impossible to steal funds or hack accounts and wallets;
- users have all the information on the movement of finances;
- there are no restrictions for political, geographical and other reasons.
The disadvantage is that working with DEX requires users to have some experience in transaction processing. Not everyone has such skills. However, more and more exchanges are opening today, the functionality of which is as simple and understandable as possible even for a beginner in the world of cryptocurrencies. In one of the following sections, we will give an example of a modern exchange, which everyone can easily use.
Example of a centralized exchange
A typical example of CEX is Binance. This platform has a huge impact on the crypto market as a whole and sets trends that directly affect the capitalization and value of certain assets. This is a system–forming a structure that spends a lot of money on its development and popularization – holds contests, supports the community.
It has its own BNB token, which is quite promising for investment, as well as all the tools for traders that only exist in nature. Binance is building its own ecosystem, stable and multifunctional, which allows the exchange to be at the top of the crypto industry.
Example of a decentralized exchange
- OKX is a decentralized crypto exchange with over 340 tokens;
- Uniswap – popular decentralized exchange for DeFi;
- PancakeSwap – the best DEX for discovering new cryptocurrencies;
- SushiSwap – fast-growing DEX for cryptocurrency farming;
- dydx – the leading decentralized crypto exchange for day trading;
- Curve Finance – the best DEX for DeFi cryptocurrency stacking;
- Kine Protocol – advanced DEX for crypto trading and betting;
- ApolloX – trade decentralized bitcoin futures.
Which to choose: a decentralized or centralized exchange
It all depends on your needs. A centralized exchange is the best choice if you are actively trading crypto-assets. It will save you money on trading fees, provide faster transaction speeds, and allow you to use instruments such as cryptocurrency futures and options.
For long-term investors or traders with trading strategies with a small number of trades, DEX will be a better choice, as assets remain in a personal wallet without third-party access.
Decentralized exchanges would also be a better choice for venture capitalists, as they allow access to crypto assets of new projects as soon as they are launched.
