Centralized Vs Decentralized Crypto Exchanges – How they’re different

When it comes to buying, selling, or trading crypto, you need to use a cryptocurrency exchange. A cryptocurrency exchange is the marketplace where buying/selling of crypto happens. A cryptocurrency exchange is pretty much the same as a stock exchange like the New York Stock Exchange (NYSE).

However, cryptocurrency exchanges are of two types- Centralized and decentralized. So the question is, centralized vs decentralized crypto exchanges – How are they different?

Well, in this article I am going to talk about this only briefly. So let’s get into the topic right away:

What Is A Centralized Cryptocurrency Exchange?

A centralized cryptocurrency comes under a third-party authority that monitors and secures the transactions on behalf of the user. The blockchain system of the exchange does not track the deals.

To use a centralized crypto exchange, you will need to verify your personal details by completing KYC. If you are an individual, then you have to provide a government ID like a passport for verification. Similarly, if you are an organization, then you have to provide corporate information to complete the verification process.

By completing verification, you will enjoy different features on the exchange. For instance, most crypto exchanges offer you a higher deposit and withdrawal quota. Also, you get faster customer support in case of a technical error.

Moreover, centralized crypto exchanges are the most popular ones among crypto investors. They are easy to use and offer a secure way to trade crypto.

Some of the popular centralized crypto exchange platforms are Binance, Coinbase, Kraken, and many others.

Pros of Centralized Exchanges

• Easy To Use: Centralized exchanges are extremely easy to use. They offer you a great UI/UX experience compared to the decentralized exchanges. Also, they are pretty easy to use and cut down any complications of connecting your wallet to the exchange to trade.
• Liquidity: Centralized exchanges are used by a majority of crypto traders. As a result, there is always a buying/selling operation happening. This brings liquidity to the market, and buying/selling crypto would be faster.
• Reliable: Centralized exchanges are extremely reliable in terms of security. Also, they comply with governments’ rules and regulations. So you know that your funds are safe on the exchange.

Cons of Centralized Exchanges

• Hacking Risk: Centralized exchanges are run by companies. As a result, they are responsible for keeping their customer’s crypto assets. And that’s why they are always under a major hacking or cyber security risk.
• Manipulation: There are several exchanges that were accused of price manipulation. As a result, the price of your crypto holdings won’t move depending on the market conditions. Instead, it depends on what the exchange decides.
• Custody: When you are using a centralized exchange, you trust them with your private keys. This means you don’t fully control your own assets.

What Is A Decentralized Cryptocurrency Exchange?  

A decentralized crypto exchange, also known as DEX, is pretty much similar to a centralized crypto exchange. However, there is no third party that monitors crypto transactions.

These exchanges are independent and do not rely on any third-party authority. Also, the funds in the exchange are stored on the blockchain.

Also, these types of crypto exchanges use peer to peer or P2P trading for depositing and withdrawing funds.

The main reason why many users like using DEX is that it makes crypto transactions anonymous from banks, brokers, or payment processors. Since they do not allow transactions between fiat and crypto.

However, not all exchanges have the same infrastructure. It completely depends on what DEX you are using. Some of the popular examples of DEXs are Uniswap, 0x protocol, Tokenlon, and more.

Pros of Decentralized Exchanges

• Highly Secure: One of the best parts of decentralized exchanges is that they are highly secure. Since they use peer to peer transactions. As a result, there is no third party involved. As a result, it reduces the risk of hacking compared to centralized exchanges.
• Anonymous: Another advantage of using decentralized exchanges is that they are anonymous and offer you complete privacy. There is no need to go through the KYC process and submit your government IDs. So you can transact without letting any third-party know.
• Safe From Market Manipulation: On a decentralized exchange, transactions happen over a peer to peer network. As a result, DEXs are prone to market manipulation.

Cons of Decentralized Exchanges

• Low Liquidity: Decentralized exchanges are not used by masses. As a result, it has low liquidity. As not too many users are indulging in buying/selling activities. Also, because of low liquidity, you might not be able to transact your funds when you urgently need cash.
• Complex To Use: Decentralized exchanges are not easy to use as centralized exchanges. In most cases, they do not offer you a user-friendly experience. Also, if you are a beginner, you might get clueless when using a decentralized exchange. Also, it requires you to connect to a crypto wallet, set up recovery phrases, and more. All of these things make using decentralized exchanges a tedious task.
• Lack of Fiat Currencies: One of the biggest drawbacks of DEXs is that it doesn’t let you deposit funds in fiat currencies. Instead, you will first need to buy crypto and deposit funds from your crypto wallet. As a result, depositing and withdrawing funds get really complicated.

Centralized Vs Decentralized Crypto Exchanges – How are they different?

Popularity

Centralized exchanges are more popular compared to decentralized exchanges. Because centralized exchanges were the first ones to enter the market. Also, they offer more liquidity, better user interface, and infrastructure, which suits both newbies and advanced traders.

But it’s also true that decentralized exchanges have also started to gain popularity. But they are far behind being used by masses.

Features

When it comes to features, centralized exchanges are definitely the best choice. Decentralized exchanges focus mainly on trading. As a result, they offer different features like spot trading, derivatives trading, margin trading, portfolio management tools, and more.

But decentralized exchanges don’t offer such features. They don’t really offer you any order types. So the crypto traders do not really prefer using them.

Liquidity

As mentioned earlier, centralized exchanges are more popular than decentralized exchanges. As a result, they offer more liquidity. On a centralized exchange, traders buy or sell crypto depending on the market move.

As a result, multiple users always tend to buy assets and create a demand in the market. Also, to fulfill the demand, there are users who sell their assets to fill up the gap.

But the same doesn’t go with decentralized exchanges. Because they are used by lesser people. As a result, order matching takes time. And you might not be able to sell your funds at your desired price.

Regulations

Centralized crypto exchanges are regulated marketplaces, unlike decentralized exchanges. Centralized exchanges require a license to operate, and they are compliant with the regulatory authorities.

But on the other hand, decentralized exchanges don’t comply with the regulatory authorities. Also, they are complicated to regulate because of the highly distributed blockchain.

The good part is that, even if a country bans all the crypto exchanges, then still decentralized exchanges will be able to operate.

Speed

Centralized crypto exchanges are faster than decentralized crypto exchanges. Thanks to the high liquidity and large user base. Your buying or selling orders can be complicated within milliseconds.

However, on DEX, you will need a minimum wait of about 15 seconds to match and execute the order. Even in some cases, it may take some time to execute your orders.

Final Words:

So that was all for centralized vs decentralized crypto exchanges. It’s good to know what type of exchanges we are using before investing in crypto. So you can know which exchange can meet your requirements. I hope now you know the difference between both of the exchanges. For any questions, comment below.