Centralized Or Decentralized Exchange – Which Is Better?

This article was published on: 10/11/18 6:05 PM

Dawid PaluchWritten by | exchange, news, ranking

An investment in cryptocurrency isn’t easy. You have a lot of decisions to make. One of the most important is choosing the exchange platform. Centralized or decentralized? What’s the difference? In this article, we compare both.

The crypto exchange is very tricky to choose. Centralization or decentralization? Which one gives more security and more options? Let’s find out.

Centralized exchange

centralized exchange

Centralized cryptocurrency exchange (CCE or CEX) is an online platform and the most common way to trade cryptocurrencies.The centralization is based on trust. To be centralized means to give somebody else your money.

CCE is like a reliable middleman. It’s very similar to the banking system. When you give your capital over to a bank, the institution is in complete control of it. Usually, this solution is very safe. Banks have many ways of money preservation including people taking care of your money.

The centralized exchange is exactly the same. A customer can deposit his capital there. From this point going on, the exchange handles his assets.

In recent years, there have been many stories about losing hundreds of thousands of dollars only because a customer has forgotten his password or 2FA (two-factor authentication – requires a password and something else: some information, that only the customer can know) when given full power over his money. With CCE, password recovering is as simple as showing an ID.

The problem with centralized exchanges is that not so many of them exchange fiat to crypto and the other way around. More often, centralized exchanges offer crypto to crypto pairing. You can swap BTC for ETH, but not for dollars or euros. However, there are few markets, who offer a crypto/fiat exchange. Among them, the most popular are CoinDeal, Coinbase, Gemini, Kraken, Robinhood.

For example, CoinDeal supports Bitcoin, Bitcoin Cash, Litecoin, Ethereum. The platform was founded in 2018.

One of the key elements in CEX is trading volume.

The volume of trade is the total quantity of shares or contracts traded during the specified time frame. For centralized exchange, the higher level of trading volume, the lower the variability of the market is. That’s a crucial parameter of any transfer. It comes down to the time. Transactions take some time during which the price of the selling goods can change. High fluctuation is a significant problem.

Decentralized exchange

decentralized exchange

It should be an exemplification of a basic blockchain idea because the technology is recognized as deconcentrated. A decentralized cryptocurrency exchange (DEX) does not rely on third-party services. In other words: this solution removes the middleman from the equation. DEX is based on peer-to-peer (P2P) trades. What does it mean? It’s simple. Exchanges occur directly between users through automatic processes.

There are at least three ways to accomplish the DEX. One of them is to create proxy tokens, the crypto assets that embody definite fiat or cryptocurrency. Another option is to form assets that can represent stakes in a company. The third one is to make a multi-signature escrow system.

The decentralized crypto exchange offers an autonomy and customization. This solution is still fairly new, though. So it makes up a small part of total digital currency trading.

The main advantage of the DEX is the security. No crypto exchange is immune to hacks, that’s a given. However, if you take out the central platform from the trading equation, a hacker can only hack one client at the time and it’s tougher than it seems.

Best known decentralized crypto exchanges are WavesDex, Bancor Protocol, Kyber Network, EtherDelta and AirSwap.

The difference of the ‘de-’

Like anything in the world, both CCE and DEX have pros and cons. They differ in many ways, though.

The trading volume for a centralized exchange is higher than for decentralized. The difficulty of use and limited functionality (no stop-loss or limit order) affect in DEX’s lower volume of trades.

Decentralized exchanges are new thus they do not possess much of the market. Some experts inform that about 95% of the crypto trade still happens on CEX.

Another distinction between these two is a fiat/crypto swap. DCEs only exchange crypto to crypto.

One of the biggest advantages of the DEX is security. More than 30 cryptocurrency exchanges hacks have happened in the last 10 years, including huge players like MT.Gox, Coincheck, BitGrail. Nodes in a decentralized exchange are spread all over the network, therefore the risk is lower when compared to the centralized one. What is more, with hosting distributed through nodes, there’s practically no risk of the infrastructure breakdown.

There is also a case of law regulations. Most of CCEs are licensed and regulated by the government organizations. However, at least three countries have prohibited centralized exchanges: China, South Korea and Russia. If it comes to DEXs, the government intervention is not possible because of the worldwide distribution. Decentralized crypto exchanges guarantee a very high level of privacy. Every transaction is anonymous thus identification of the customer is virtually impossible. CCEs require sensitive information about users, including ID, specifics about the bank account and home address. Sometimes it can be a good thing – the identification of the thief is possible.

Last, but not least, CCEs offer more functionality. They provide margin trading, discounts for big traders, institutional trading tools and much more. In DEXs, a customer is more like the lord of the manor. Functionality is limited due to lower trading volume and the reasons explained earlier.

What to choose?

There are as many opinions as people you ask. If you want an insurance and transparency, centralized cryptocurrency exchanges would be your pick. If you are a mister self-reliance, who likes to do his business by himself, you should go with the decentralized exchanges. Basically, it all comes down to what kind of the person you are. If you’re willing to take a risk and hate to pay the middleman go for the DEX. However, if you don’t mind handling your money to someone else and paying fees from transactions, the CCE is your answer. We are leaving the choice up to you.

Last modified: October 12, 2018

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