Centralized vs Decentralized Crypto Exchange

What are the differences between centralized vs decentralized crypto exchange? While dealing with cryptocurrencies, you will need to use crypto exchanges that will facilitate the trading process.

In this context, you can either choose a centralized crypto exchange or a decentralized exchange but which will be just right for you will need you to know the differences between them. This article will do just that, if you do know them already.

The centralized crypto exchanges have been around for several years now and therefore are more mature, but the decentralized exchanges, in spite of being comparatively new, offer a different approach to crypto trading.

However, while choosing, you must also keep in mind a few other factors such as the user experience, types of trades offered, the volume and velocity of the trades, as well as the security measures.

Therefore, choosing the one that is right for you will be quite difficult if you do not know the differences between them in the first place.

Differences Between Centralized vs Decentralized Crypto Exchange

Differences Between Centralized vs Decentralized Crypto Exchange

When it comes to dealing with crypto coins, whether investing or trading, users need to choose the right crypto exchange for that matter.

It can be either a centralized crypto exchange or a decentralized crypto exchange according to your preference.

It is only when you know the differences between these two types of exchanges and compare the two, it will be easy for you to make the right choice in the end.

Here is a detailed list of differences that will help you a lot in this regard. Check out Differences Between Trading and Buying Crypto.

  • Control

In terms of control over the account, in a centralized crypto exchange, it is in the hands of the one who runs the exchange or the third party. The third party is responsible for the management of funds deposited into the accounts.

Typically, in these centralized crypto exchanges the users do not have any control and therefore cannot even do their own negotiations while trading.

On the other hand, you will have complete control over your account when you trade over a decentralized exchange. Since in these crypto exchanges there are no central servers the users can easily and freely connect with other users with whom they want to trade their crypto coins with.

This feature has made these decentralized crypto exchanges more popular than the centralized exchanges but along with it, this has also made these exchanges more complex.

  • Security

When it comes to the security of the two platforms, though both decentralized and centralized crypto exchanges are adequately secure, you will get more of it when you trade over the decentralized exchanges or DEXs.

Since there is no third party controlling the accounts, chances of these accounts being hacked and the users losing their money is minimized, if not negated completely, provided there are no issues with the DEX gates.

This is because it is quite impossible to hack an entire blockchain, which is distributed by nature on these platforms, or at least more than half of it.

On the other hand, the centralized exchanges or CEXs have the risk of being hacked. The main reason behind it is that the private keys are in the hands of a third party which makes it easy to hack them.

This means that, when and if hacked, the users can lose all their funds and coins because only one central point needs to be hacked.

  • Popularity

In terms of popularity, the centralized crypto exchanges have left the decentralized exchanges quite far behind, well, as of now. The most significant reason of all is that the centralized exchanges have been around in the market more than the decentralized crypto exchanges.

Moreover, the infrastructure of these centralized crypto exchanges is also better than the decentralized exchanges and therefore they can offer more liquidity.

In comparison, the decentralized exchanges are far less popular even though these exchanges offer unique advantages in terms of accounts and wallets over their counterparts. However, these exchanges are growing in number in the market and over time will grow in popularity as well.

  • Fees

When it comes to the fees, if you use the centralized crypto exchanges for trading, be prepared to pay a considerable amount in transaction fees for each trade made.

The service charges imposed by these exchanges may vary from one provider to the other depending on the features and types of services provided, but, for all, the fees may add up to a significant amount, in the end, to eat up the profits made on a trade.

In contrast, the decentralized crypto exchanges usually have zero transaction charges. Even if a few of the DEXs charge fees for a transaction or for matching trade orders on the blockchain, it is quite low.

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Therefore, trading over the decentralized crypto exchanges will enable you to have more profits in comparison to that made on a centralized crypto exchange.

  • Features

If you consider the features of the centralized crypto exchanges you will see that these come with more, if not better, features in comparison to the decentralized crypto exchanges.

A few of the major features included in and offered by the centralized crypto exchanges to the users are the ability to perform margin trading, using several advanced order types, and using several portfolio management tools.

All these features will allow you to trade more conveniently and in a much better way.

The decentralized crypto exchanges, on the other hand, come with limited features in offer. These exchanges do not allow their users to perform margin trading and other similar features, as of now.

However, when more sophisticated decentralized platforms will be launched in the market in the following years, those will come with better features.

  • Regulation

The centralized crypto exchanges are easier to regulate as compared to the decentralized ones. This is because all the centralized exchanges need a proper license to operate and at the same time need to stick to the rules and regulations as laid down by the local regulatory authority of the region.

On the other hand, when it is compared to the decentralized crypto exchanges, they do not have to follow any rules and regulations as such.

This is because it is quite challenging to do due to the distributed blockchain system that they follow. This means the decentralized exchanges can operate even in a region where crypto exchanges are banned by the government.

  • Liquidity

The users who trade crypto over the centralized exchanges will be benefited more as compared to using those users who use the decentralized exchanges.

This is because the centralized exchanges offer more liquidity which is due to the fact that several users on the platform place specific orders depending on the trends followed in the market.

This means that when a particular crypto coin is in demand there will be lots of users who will be willing to buy or sell that particular crypto coin. This results in more liquidity, which is even enhanced further by the market makers included in these platforms.

As for liquidity, the decentralized platforms do not have much of it to offer to the users. The most significant reason for these platforms to offer low liquidity is that they take a lot of time in comparison to the centralized crypto exchanges in matching the orders placed by the users.

  • Speed

The centralized crypto exchanges take less time to execute an order in comparison to the decentralized exchanges. In fact, several analysis reports have found that the centralized crypto exchanges can execute orders in 10 milliseconds on an average, and it includes matching as well as filling the orders.

On the other hand, the speed of the decentralized crypto exchanges to execute an order is a minimum of 15 seconds. This speed is determined by and is dependent on the particular protocol used by the specific platform.

In addition to that, the decentralized exchanges can also take as much as one minute to complete an order. Adding both, the amount of time taken by the decentralized exchanges to execute and fulfill an order is considerably more in comparison to their centralized counterpart.

  • Anonymity

Users who trade over the centralized crypto exchanges cannot ensure that complete anonymity will be maintained during making a transaction. This is because these crypto exchanges need their users to go through the strict Know Your Customer or KYC process.

In addition to that, the platforms also need to follow the AML or Anti-Money Laundering laws. All these make it quite difficult to maintain anonymity since the information is in the hands of the central authorities of the centralized exchanges.

On the other hand, when users trade on a decentralized crypto exchange, they do not need to furnish any personal information or other sensitive details to verify their identity.

This ensures anonymity while making the transactions. It is for this reason the decentralized crypto exchanges are considered to be the same as a distributed blockchain.

  • Authentication and Authorization

When you trade your crypto assets over a centralized crypto exchange you will need to have each and every trade approved from and authenticated by the central authority of the exchange. It is this third-party involvement and intermediary that ensures more reliable and safe crypto services.

However, in comparison, trading via the decentralized exchanges will not need such authentication or authorization because it operates primarily on the blockchain protocols such as smart contracts that allow the users to trade freely.

  • User Friendly

The centralized crypto exchanges are more user friendly in comparison to the decentralized crypto exchanges. This is mainly because these exchanges do not support making P2P transactions, which, by itself, is quite complex.

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Therefore, these specific types of crypto exchanges come with an intuitive interface as well as an easy to use platform.

The websites of these exchanges along with their apps are also quite easy to use and comprehend, all of which eventually makes it more comfortable for the users to trade their crypto assets at any given point in time.

In comparison, the decentralized crypto exchanges, on the other hand, do not offer such comfort to the users. The interface is quite complex and even the apps are quite cumbersome to use which makes these platforms less user friendly.

However, the modern decentralized exchanges have taken up this issue seriously and have made significant advancements and improvements in it.

Adding to the complexities of the users of decentralized crypto exchanges is the fact that the DEX platforms do not provide means to recover the passwords to the crypto wallets in case these are lost.

  • Reliability

If you leave aside the possibilities of hacking the central authority of the centralized crypto exchanges, these are quite reliable since these platforms come with an additional layer of security.

In fact, their advanced platforms are as developed as those you will find in a stock exchange which is why banks and other crypto traders prefer using the centralized exchanges.

However, the decentralized crypto exchanges typically fail to provide such a high level of security and reliability in other aspects of crypto trading excluding the fact that these platforms are difficult to hack.

This is something that the crypto traders and investors do not like because they are already participating in a much more unreliable and uncertain crypto environment and therefore need a platform that is highly reliable.

  • Market Manipulation

When you trade on the decentralized crypto exchanges, like all users, you too will be sheltered from market manipulations.

This is because the platform itself will prevent such things from happening due to the fact that interactions on these platforms are typically P2P in nature.

In contrast, there is a high chance of the users being subject to market manipulation and its consequences because the central authority acts as the intermediary between the parties involved in a transaction.

  • Fiat Payments

One of the most significant differences between the centralized crypto exchanges and the decentralized crypto exchanges is that the decentralized platforms do not support trading fiat currencies for the digital assets. This is perhaps the biggest downside of the DEX platforms.

On the other hand, the centralized crypto exchanges allow making fiat payments. This means that both the users who do not hold any crypto coins and those who hold and wish to liquidate them according to their need and ease will find it very convenient to use these centralized exchanges to make a transaction.

Which is Better – Centralized or Decentralized Crypto Exchange?

As you can see from the list of differences above, both centralized and decentralized crypto exchanges have their own characteristic features, benefits, and downsides.

However, both these platforms add to the functionality and also give the crypto market a much broader and the required exposure.

Therefore, choosing one exchange for your crypto trading needs as well as to expand your crypto portfolio must be done according to your needs and the given situation.

For example, if you want to have ease of access while using a platform, you can choose a centralized crypto exchange.

Since these exchanges are prevalent, most users looking to trade crypto assets look for these exchanges simply due to their liquidity, trust, cybersecurity expertise, and more feature-rich and robust user interface.

On the other hand, choosing a decentralized crypto exchange will be a more feasible move if you want anonymity to be maintained while making a transaction since it will add to the privacy of the users.

Since there will be no third party or a central authority, no one will have access to your information easily. And, these platforms also allow the users to have more control over their assets.

If you consider the future, Decentralized Exchanges or DEX platforms, in particular, have quite a lot of growth potential and promise.

This is because these platforms are designed to get better over time and the features and services offered by them will be more innovative.

And, the security issues or inefficiencies, whatever there is, will be much more improved and its low liquidity issue will also be resolved.

In spite of the drawbacks of the decentralized exchanges such as their slow performance, difficulty in use, and high cost, companies are spending millions of dollars in designing much improved decentralized apps or dApps that will provide much better solutions with a more reliable framework and much better algorithm.

This will not only enhance the performance but will also augment the security of the decentralized exchanges at the same time.

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On the other hand, the centralized exchanges are also quite good and have been reigning supreme in the crypto markets right from the existence.

Typically operated by a central authority, all the information and data goes through a single point. It is unlike the traditional network that has several points connected to the system.

The decentralized exchanges still struggle to compete with the centralized exchanges even though they operate with the help of smart contracts.

The primary reason behind this is the technical difficulties that make accessing the platforms more difficult.

Moreover, all the transactions made on the decentralized exchanges have to go through different hard drives to get processed and verified so that they can achieve the desired results.

This magnifies the difficulty in completing and process and also makes it a longer one.

It is the shared blockchain network that seems to be the major issue in improving decentralization especially while dealing with cryptocurrencies, a significant part of which is resolved by the use of smart contracts. Also, the distributed apps add to the functionality.

On the other hand, when you use the centralized exchanges, no data or information can be sent or received without passing through the solitary point, but that is actually at the cost of the personal information and privacy of the users.

Even the passwords get stored on the central server and are sometimes shared with different government agencies due to some specific regulations.

This is not good for crypto trading because it demands complete safety and anonymity.

Moreover, the centralized exchanges are also vulnerable to attacks and bans which may be a significant point of concern as to whether or not these platforms are good to use for crypto trading.

Well, you may be confused even now. Therefore, summarizing the benefits of a decentralized exchange and a centralized exchange will help you to make the right choice, for sure.

The most significant benefits of using a decentralized exchange for crypto trading include:

  • Privacy, since there is no central authority and it does not ask for personal information such as ID proofs, email IDs, or phone numbers while signing up
  • Security, which gives the users a complete peace of mind and control over their crypto assets and
  • Safety, since the decentralized servers store all data across several servers all over the world thereby keeping the data safe and impossible to hack.

On the other hand, the centralized exchanges for crypto come with their own merits that bring crypto to the masses in spite of its vulnerability to some extent. The other benefits of these CEX platforms include:

  • Its ease of access to the users who simply have to sign up with them and create an account following the specific requirements to start trading
  • The assurances provided to the traders with their license and running according to the government regulations
  • Their use of an escrow to hold the coins to ensure both the parties get what they want at the end of the bargain
  • Its transparency by making their address, location, and contact details available to the traders and
  • Offering discounts while trading in large volume.

Also, in addition to the above, the CEX platforms allow converting fiat to crypto and crypto to fiat.

Now, if you ask, which platform is likely to prevail in the foreseeable future, the simple answer is, both these two models will.

While the decentralized exchanges will offer more transparency, accessibility, security, and passive yield, the centralized exchanges will not lag far behind them by adopting Automatic Maker Models and smart contracts.

However, there is also a high chance of the centralized exchanges staying ahead of the decentralized exchanges given the high influx of institutional investors in the crypto market seen at the moment.

And, with the advancements in technology, such as DeFi, pushing the decentralized exchanges even further forward, there may also be some hybrid models emerging pretty soon with complementary apps in the future.

This will make these two distinct models merge and work together more efficiently.

Conclusion

The centralized exchanges surely benefit the investors and the crypto sphere but the main intention of crypto creation can only come true with a decentralized exchange. Now, with the differences known, choosing one for you would be easy.