What Is The Difference Between Centralized & Decentralized Exchanges?
Centralized vs decentralized exchanges have some notable differences. Centralized exchanges (CEX) have a single governing entity. Contrarily, decentralized exchanges (DEX) are more open to the public.
This article will provide a complete view of the primary differences between centralized and decentralized exchanges. We will also go through their advantages and disadvantages.
Crypto exchanges have increased significantly in the last few years. They have been a great convenience for investors to easily buy, sell, and exchange cryptocurrencies. However, with so many choices all of a sudden, it has become difficult to choose the one best for you.
But to establish the best course of action, it’s important to learn the key differences between the two types of exchanges. So, let’s begin and see what each one brings to the table.
Table of Contents
Centralized Vs Decentralized Exchanges
Centralized exchanges (CEX) act as an intermediary between buyers and sellers of the cryptocurrency. Almost every crypto transaction takes place through a centralized exchange as there is more trust involved.
Centralized exchanges are platforms that allow users to buy and sell crypto coins for fiat currencies. They act as your broker in deals.
Brokers do allow you to store your cryptocurrency with them, but it’s suggested that you maintain your digital assets in a cold wallet. This way, you are the sole owner of your coins. You do not have full ownership of your coins if you only store them with brokers.
A recent occurrence of this has been of the FTX exchange that shocked the crypto world after it abruptly filed for bankruptcy, resulting in billions of dollars of loss for investors.
Examples of Centralized Exchanges
Advantages of Centralized Exchanges
- Easy to use and user-friendly interface.
- Offer a wide range of products and integrated services turning it into a one-stop crypto shop.
- A CEX like Binance gives access to trading and staking services, an NFT marketplace in one place.
Disadvantages of Centralized Exchanges
- Service fee charges
- Too much control in one centralized entity’s hand
- Highly prone to security threats at times
A decentralized exchange (DEX) is the opposite of a centralized exchange. A single entity does not have all the control and is not in charge of all the assets. Instead, these exchanges use smart contracts to carry out transactions.
These exchanges allow users to control their assets. DEXs often run on a traditional order book model or an AMM (Automated Market Maker).
Advantages of Decentralized Exchanges
- Anonymous and private
- No need for a third party
- Liquidity providers get the fees instead of a central authority
Disadvantages of Decentralized Exchanges
- Does not allow trading in fiat currency
- Liquidity can be minimal, making it harder to carry out large orders
- Risk of loss for liquidity providers
Centralized Vs Decentralized Exchanges: The Difference
In a central exchange, if you lose your investment, the crooks flee with your money. Similarly, the exchange also holds your safety in their hands. This is a slippery slope for many reasons, especially with scandals such as the LUNA and FTX – where the brokers stole billions from investor clients.
Decentralized exchanges, on the other hand, are blockchain-based. Blockchain technology is extremely secure and has less risk of a third-party running away with your money than centralized exchanges.
In a DEX, users retain control of their digital assets. On the other hand, CEX retains the entire control of your assets.
To improve your trading, you may employ several sophisticated tools. Centralized exchanges generally have more features than decentralized ones. Decentralized exchanges give the customer a limited number of order types.
For instance, generally, you do not have access to margin trading on DEXs. Of course, as the technology progresses, we can expect more functionalities on these decentralized exchanges as well.
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A drawback that decentralized exchanges have been the low liquidity levels compared to centralized exchanges. Automated Market Makers (AMMs) have tried to solve this issue of liquidity.
But despite its benefits, the AMM model is not enough to replace the centralized order book model accuracy yet.
There are over 20,000 cryptocurrencies currently. On CEX, cryptocurrencies have to pass certain security criteria and regulatory requirements. That means you can’t just buy and sell anything on a CEX.
On a DEX, however, you can list anything. This can mean that you will take on more risk but it also means that you will be able to trade in new and in-demand assets. It can also mean that you will gain bigger rewards.
Note that diversifying without any research can backfire pretty badly. Therefore, I strongly urge you to move into any investment with lots of research and information on hand.
Fees are a major concern for most crypto traders. On a decentralized exchange, you may be required to pay a gas cost. You do this to carry out your trade on the blockchain. However, this can be expensive depending on the chain.
Centralized exchanges also take a cut of the cost for each transaction, but it works like a per-trade fee.
Centralized exchanges are usually faster than decentralized ones. On average, it takes a transaction 10 seconds to finish on a CEX. In contrast, on a DEX, it takes 15 seconds to match and execute the order.
The government regulates and licenses the majority of centralized exchanges. Some countries may prohibit crypto exchanges. For instance, India, Russia, South Korea, and China are all countries that have put some sort of bans in place on crypto exchanges. Thus, often, it is in the best interest of CEXs to abide by the regulations of the government.
On the flip side, countries like El Salvador are taking Bitcoin in stride with the president of the country pushing the use of Bitcoin domestically. This is helping make finances more accessible for the country as anyone with the internet can deal in Bitcoin. El Salvador has adopted Bitcoin as legal tender which has greatly helped local businesses accept Bitcoin payment and expand their resources. Of course, centralized exchanges are what’s making this possible.
On the contrary, governments do not influence decentralized exchanges. They cannot turn it off simply because they don’t like it. That is the biggest advantage of a DEX. It gives people the power of accessibility to money and freedom of choice.
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Final Thoughts: Centralized vs Decentralized Exchanges: Key Differences
Centralized and decentralized exchanges are both technologies improving by the day. Each one brings with it its own set of features, and pros and cons.
The key differences between the two types of exchanges are important to know so that you can choose what’s best for you.
When trading bitcoin and other crypto assets, it’s better to start with CEXs to get a safe entry into the crypto world. You can then move on to DEX after a while for larger rewards.
Therefore, the most important rule to follow is to never invest money that you cannot afford to lose.
Further reading: How to Build a Sustainable Decentralized Financial Systems
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