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Centralized vs Decentralized Cryptocurrency Exchanges: What’s Better and Why?

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The term “Cryptocurrency” has been ruling the market for quite some time now. Cryptocurrencies have been a primary concern since it is secure and trustable. Cryptocurrencies are digital and they cannot be forged and that’s the main reason why investors are interested in making investments in crypto exchange services. 

There has been a steady rise in the cryptocurrency traders which has increased the demand for cryptocurrency exchanges. 

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Well, it simply means that the cryptocurrency exchanges are the ones that allow the cryptocurrency investors to buy or sell cryptocurrencies instantly. To form a well-established trading platform, a lot of crypto exchanges support more than 20 currencies on its platform.  

A cryptocurrency is quite close to what a stock exchange is but it primarily focuses on crypto tokens and not stock trades. There are mainly two types of cryptocurrency exchanges;

  • Centralized Exchange (CEX)
  • Decentralized Exchanges (DEX) 

What is a Centralized Cryptocurrency Exchange?

A centralized cryptocurrency exchange is one of the most preferred exchange platforms by crypto traders. Centralized cryptocurrency exchanges are online platforms that are used to buy and sell cryptocurrencies. Since digital currencies themselves are often designated as ‘decentralized’ few investors still find the idea of centralized exchange misleading. 

The question arises that what makes it a centralized system and why do these exchanges play a crucial role in making the crypto industry a successful one. 

The term “centralized cryptocurrency exchange,” refers to the idea of centralization of cryptocurrency exchanges, i.e., the presence of an intermediary or third party that conducts the transaction. The buyers and sellers of assets trust the central authority who is responsible for handling these assets. This is somewhere like a bank setup, where the customer trusts the bank to hold their money. 

The centralized cryptocurrency exchange is similar to banks. The transactors trust exchange platforms that it will safely complete the transaction process for them. 

Along with this to keep a record of their trading partners the centralized system makes use of their network of users to have access to the data of transactions made. 

In case of using a cryptocurrency which is mostly stored in a digital wallet, an individual can lose a huge amount of money stored in the wallet if they forget the key to the wallet. 

Here the exchange platforms assure to safeguard the valuable assets of the individual.

What is a Decentralized Cryptocurrency Exchange?

The term “decentralized cryptocurrency exchange” is often considered an oxymoron. A lot of cryptocurrency exchanges have publicized it as a decentralized exchange whereas the truth is that it is in a way a centralized platform in itself. 

Decentralized exchanges are independent of having any mediator, they are supported only by blockchain technology and not by any company. The server is definitely controlled and centralized, but not the exchange platform. Decentralized cryptocurrency exchanges ensure users full control over their funds and therefore, safeguard the funds from being stolen. 

Unlike centralized exchanges, users don’t have to send their funds to wallets that are controlled by a single exchange, whereas a decentralized exchange relies on digital signatures that directly authorize their trading orders. That is the reason decentralized exchanges work slower than centralized ones. 

Decentralized exchanges do not store private data and information of its users while they are making transactions and allow only trading. 

Centralized Exchanges vs Decentralized Exchanges: The Difference

Centralized exchanges allow fiat-to-crypto trade (or vice-versa). Along with this, the exchanges also allow trading between two different cryptocurrencies. 

Decentralized exchanges eliminate the intermediary and function as peer-to-peer exchanges. The assets are not under any specific custody and the transactions are completely based on smart contracts and atomic swaps.

The key difference between centralized and decentralized exchange is the presence of a middle man. The decentralized exchanges are less popular as compared to their centralized counterpart. 

Centralized Exchanges: Why is it a Preferred Choice?

The success or failure of exchange is completely dependent upon a lot of factors. The key component to its success is the trading volume of the exchange platform. 

The volatility of the market is a crucial factor that is taken into consideration to categorize the success or failure of an exchange. The time it takes for the transaction to be completed, there are chances for the price of the given token or coin to be changed. Interestingly, transactions are processed much faster if the trade volume is high.

The second crucial factor of categorization is security. No exchange can be totally hack-proof. While some centralized exchanges have been able to refund customer losses, others haven’t been able to do so. 

For investors looking to enter the crypto space, a centralized exchange is still a common choice. When selecting an exchange, it’s important to keep in mind the bunch of factors which will impact user experience, including which pairs are traded, it’s trading volume and security measures, the exchange has adopted to protect the assets of the customers.

Decentralized Exchanges Get Support from Computer Scientist John McAfee, Why? 

A computer programmer and a businessman, John McAfee, has been promoting a decentralized economy and has also created McAfeeDEX. He was recently seen emphasizing on the importance of distributed/decentralized crypto exchange. 

As per his analysis, it is not possible to shut down the decentralized system mathematically, technologically, or even physically, and that is the reason the future of the blockchain industry depends on them. 

The decentralized exchanges allow the users to have complete control over their funds. There are no chances of having a single failure. It is not centrally controlled by a single group of companies, individuals or the government. And most importantly, the decentralized exchange platform promotes user privacy.  

The fact is decentralized exchanges are important for the crypto industry as centralized exchanges are prone to human errors. And some previous reports by QuadrigaCX based on the manipulation reports of the centralized exchanges are strong examples of why a decentralized system is better. 

It is important to be able to choose the appropriate trading platform before investing your funds. Reliable platforms like bitcoin code ensure good benefits to its traders. To know more about this platform it is recommended to go through Bitcoin Code review.

Ruchi Brahmbhatt

Ruchi is an Independent Artist and a Graduate in English Literature with substantial experience as an IELTS coach. Being young and energetic, emerging technologies attract her to the core- blockchain and crypto being the most recent ones. She has also been a regular contributor of news pieces and insightful articles related to these innovative arenas. Ruchi’s other interests include human rights, art and architecture, technology, health, and social networking.

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