In order to be able to trade cryptocurrencies, you will need to use a crypto exchange. But did you know there are two kinds of cryptocurrency exchanges: centralized and decentralized?
In this post, we’re discussing the differences between centralized and decentralized crypto exchanges to find out which one is better.
Centralized Crypto Exchanges
A centralized crypto exchange is a platform where you can sell and buy different cryptocurrencies such as Bitcoin and Ethereum. In these crypto exchanges, a third party is responsible for monitoring and securing the transactions and the blockchain system doesn’t track the deals.
If you’re using a centralized exchange, you’ll be required to verify your personal info. If you are a company, you’ll need to provide corporate information so that the exchange can verify your account. As a verified user you will enjoy a higher withdrawal quota, as well as access to customer support in case of technical errors.
Some of the most popular centralized crypto exchanges are Coinbase, Binance, and LocalBitcoins.
Decentralized Cryptocurrency Exchanges
A decentralized crypto exchange or DEX enables users to trade digital assets without the need for third-party brokers. The user connects their crypto wallet to a decentralized crypto exchange, selects their crypto trading pair, enters the amount, and hits the swap button. Decentralized exchanges usually don’t have a central authority involved, which means that users can sign in and start trading without any identity verification.
The funds in these exchanges are stored on the blockchain, and they also allow P2P or peer-to-peer trading. Some examples of DEXs are Barterdex, Uniswap, Curve, and AirSwap.
Difference Between Centralized Crypto and Decentralized Crypto Exchanges
Here are some of the most important differences between these two types of crypto exchanges:
Popularity. Centralized cryptocurrency exchanges are currently more popular because they have better infrastructure and more liquidity, but they also offer more reliability.
Security. DEXs offer more protection than centralized exchanges. One of the biggest risks when buying and selling on a centralized cryptocurrency exchange is the possibility of being hacked. If the third party gets hacked, the hackers will get access to all the funds and you might lose all your crypto holdings. With decentralized exchanges, users don’t need to transfer their assets to a third party and therefore, they are assured of greater safety from theft and hacking. Centralized platforms put lots of effort into increasing their security, and some of them also offer decentralized accounts.
Control. With a DEX, all the control is in your hands, whereas with a centralized cryptocurrency exchange, the third party running the exchange will have most of the control over your account.
Regulation. Centralized cryptocurrency exchanges are much easier to regulate than decentralized platforms. This is because the former need licenses to operate and have to be in compliance with the local regulatory rules and regulations. DEXs are more difficult to regulate because they exist on the blockchain as a series of smart contracts. This means that even if the government bans cryptocurrency exchanges, DEXs will still be able to operate.
Features. Centralized cryptocurrency exchanges offer various features such as spot trading, margin trading, and portfolio management tools. Decentralized exchanges, on the other hand, have a limited number of features.
Speed. Centralized cryptocurrency exchanges are faster than their decentralized counterparts. Research has shown that a centralized cryptocurrency exchange takes about ten milliseconds to complete an order, whereas a decentralized one needs at least 15 seconds.
Liquidity. Centralized cryptocurrency exchanges have higher liquidity. According to research, centralized exchanges facilitate about 99% of all cryptocurrency transactions, which suggests that they’re accountable for the majority of the trading volume. Decentralized exchanges often lack liquidity due to the lack of volume, and it can be hard to find sellers and buyers when trading volumes are low.
Fees. Centralized cryptocurrency exchanges often charge high transaction fees for their services. The fees can be especially high when trading in large amounts. Decentralized crypto exchanges have zero or minimal charges.
Final Thoughts
Before you decide to invest in cryptocurrency, it’s very important to understand the types of crypto exchanges. Whether you choose a centralized exchange or a decentralized one will depend on your personal preference. While many crypto users give preference to centralized exchanges due to their speed, features, and popularity, there are some who prefer decentralized ones due to their anonymity, zero/minimal fees, and security.
