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Crypto is growing far beyond expectations and its market value at rise is attracting new traders and startups. Even though there are many concerns and confusion raised on its function, safety, and security, the increased price and value today and the great expectations for the future are reasons for the growth of the trillion-dollar industry.
Investing in cryptocurrency requires some knowledge to use it to its full potential and in a safe manner. If you are someone who has been invested in learning about them as they are growing in value day by day, you would have heard about centralized and decentralized exchanges.
Cryptocurrency exchanges are platforms where cryptocurrency trading occurs and acts as an intermediary between the traders. These exchanges make crypto trading and storing less complicated. There are quite a few things to know before investing, like its function, advantages, and disadvantages. Let us get to know them better.
Centralized Exchanges
Centralized Exchanges (CEX) are the traditional way of exchanging crypto. They act as a mediator in regulating the safe exchange of cryptocurrencies and fiat money. The government of the country regulates these exchange services provided for traders and investors.
Cryptocurrency exchanges were initially hard as they required technical knowledge and great trust in the organization or person to which the transaction is being done. Centralized exchanges increased the possibilities of buying and selling, making it easier and quicker.
Centralized exchanges provide services with a charge. It is owned and governed by an entity or organization. Their key services are providing security to the users, managing their accounts, and making transactions.
Decentralized Exchanges
Decentralized Exchanges (DEX) are the recent and innovative way of exchanging crypto. This kind of exchange doesn’t require a mediator and is a direct peer-to-peer transaction. It is created on blockchain technology and doesn’t require any third-party interaction.
It works without any authoritative regulations and is an unrestricted way of trading. The transactions are done between traders directly, so the keys to their wallets are completely in their hands. They also should have great knowledge of smart contracts and blockchain technology to do this. DEX also has the option to invest anonymously.
Centralized Vs Decentralized Exchanges
Crypto exchanges act as a platform for easy trading and investing. They are of two types, centralized and decentralized exchanges. The following comparison will help to get a better understanding of both and help to decide which one better suits your interests.
Liquidity
Liquidity refers to the easy selling and buying of an asset without affecting the market price. Higher liquidity means better safety against market manipulations.
Centralized exchange offers better liquidity than decentralized exchange. This is because they have been in the market for a longer period, and have more buyers and sellers, market makers, and different trading assets like fiat money. Decentralized exchanges have lower liquidity due to a smaller user base and trading assets and are prone to market manipulations.
Custody
The users’ keys to the currency wallets differ in each exchange. Centralized exchange holds the private keys of their clients’ wallets. They act as a custodian of the funds and require great trust from the users.
Decentralized exchanges are owned by no entity and hence the keys to the wallets are held by the users themselves. The users using DEX have full access to their assets.
Risks Of Hacking
Centralized exchanges are more prone to hacks as large numbers of wallets of various users are held at a single location. Therefore, it can cause large losses if hacked.
Decentralized exchanges have reduced risks of hacking as they are less targeted and each individual holds the keys to their own wallets, which means less amount of assets are located in a single place.
Privacy
CEX compromises user privacy as it requires Know Your Customer (KYC) procedures. This is to restrict illicit activities and requires the submission of documents that verify the user’s identity. DEX doesn’t have KYC requirements and anonymous trading is also possible. This secures user privacy.
User Friendly
Centralized exchanges are more user-friendly as they are designed for effortless navigation, deposits, and withdrawals. It is already established and supports a wider range of cryptocurrencies and trading assets.
Decentralized exchanges are more technical and need knowledge of blockchain technology and smart contracts. A mistake in coding may lead to great loss.
Trust
It requires great trust in the entity for the users to give their wallet keys to an organization. CEX users rely completely on the entity where they have deposited the money. DEX users don’t have to go through this as they hold the sole responsibility for their crypto, but need to be technically aware.
Recovery
Recovery of the account is possible in CEX as they have the details of the user through the KYC process, whereas a DEX user cannot recover the funds or account if lost. DEX doesn’t have a third party and if anything happens the responsibility is held only on the user.
Fees
CEX often costs more as there is an involvement of a third-party entity. It requires fees for centralized control and infrastructure services they provide. DEX usually charges a lower amount as there are fewer costs associated with the maintenance.
Censorship
As centralized exchanges are regulated by the government and other organizations, it is subject to censorship, whereas decentralized exchanges are governed by smart contracts and won’t be censored.
Summing Up
Everything is getting digitalized and our tangible way of money transactions has also been digitalized. It has now grown to a level where they are encrypted data rather than our notes and coins. Crypto has grown ever since its inception in 2009.
Investing in the right way that suits the individual is crucial and that is when centralized and decentralized exchanges should be taken seriously. Both have their advantages and disadvantages. It is better to invest in centralized exchange if you are a beginner as it is user-friendly.
Decentralized exchange requires more technical knowledge but doesn’t have many privacy issues, even anonymous trading is possible.
Technological advancements and the involvement of government and regulations increase the interest of future investors. Get yourself aware of the growing possibilities as well as risks associated with it.
