A cryptocurrency exchange is necessary for the crypto business as it allows investors to buy and sell cryptocurrencies easily. With new cryptocurrencies arising, more exchanges are coming up to meet the need.
There are two main types of exchanges- centralized (CEX) and decentralized (DEX) exchanges, each with pros and cons. In this article, we will carefully look at each and help you figure out which exchange is best for you.
Centralized Exchanges
A centralized exchange acts as a go-between or broker between the buyer and seller, making money from transaction fees and commissions. Examples of CEXs include:
- Binance
- Kraken
- Coinbase Exchange
- KuCoin
- Bitfinex
How do Centralized Exchanges work?
A CEX works like a trading website. They are so-called because the exchange controls all the trading. First, traders deposit funds in an account for a while before any transaction happens. The CEX permits the trader to buy or sell at the current price or wait till they get their desired price.
CEXs use an order book, which is an electronic ledger with all the buying (bids) and selling (asks) orders. It also contains the prices of the orders as well as the total number of cryptocurrencies involved.
Pros of Centralized Exchanges
Accessibility
CEXs are more popular, especially with beginners. They are easier to understand and access than DEXs. Additionally, cryptocurrencies here are more liquid due to the CEXs high trading volume.
Anonymity
While matching orders between buyers and sellers, the CEX acts as the central clearing counterparty, ensuring that the trade is between each party and the exchange and that both parties meet all the obligations. This means that neither party really knows who they are trading with.
User friendly
CEXs are designed to enable the user to trade easily, making it easier to trade and invest on the platform. They are favored by beginners because they are easy to log in, transact and view account balances. They also offer customer support helping users with any queries they have.
Fiat Support
Some CEXs also allow users to deposit fiat currencies such as USD or Euro. This means traders on such platforms can exchange cryptocurrency for a fiat currency, like an Ether for Euro.
Cons of Centralized Exchanges
Low Security
Though centralized exchanges have strict guidelines, they are more susceptible to hacks. CEXs can hold up to billions of dollars, making them a target for hackers. Unfortunately, once your funds are stolen you may not be able to recover them back. In addition, most CEXs stand as custodians of users’ accounts, which means they also have access to your private keys. This opens users up to the risks of fraud.
Charges
CEXs usually have large transaction fees as this is how they earn their money, and the higher the trading amount, the higher the fees.
Folding
CECs highly depend on trading volume. The higher the trading volume on an exchange, the more stable it is and the faster the transactions. However, if an exchange does not pick up, it can easily fold, and users will lose their funds.
Market manipulation
Some CEXs try to influence the value of the cryptocurrencies, either inflating or decreasing their value. They are also prone to wash trading, where investors working with brokers buy and sell the same cryptocurrencies at the same time.
Lack of transparency
CEXs do not reveal how much money is made from the transaction or their internal operations, which does not give a clearer picture of the cryptocurrency’s trading history.
Decentralized exchanges
A decentralized exchange is a trading platform that allows cryptocurrency holders to buy and sell their assets without brokers or intermediaries. The trader using this platform has full control over their funds and does not deposit them in third-party accounts. Some of the main DEXs include:
- PancakeSwap
- Kyber
- Uniswap
- dYdX
- Curve Finance
How do Decentralized Exchanges work?
Decentralized exchanges rely on blockchain technology to operate and use peer-to-peer trading. They mainly use smart contracts, which are codes written in the Blockchain to facilitate transactions.
These smart contracts follow a simple ‘if/when’ statement to ensure that actions are only executed when terms are met, increasing privacy and reducing slippage.
Pros of Decentralized Exchanges
Safety
Decentralized exchanges are more secure than centralized ones because the investor has control over all their information, funds, and transactions. There is no third party in control of their private keys or assets.
Market control
Since DEXs rely on peer trading, they are less prone to market manipulation than CEXs.
No Censorship
DEXs are not controlled by anyone, which means no one can censor a transaction.
Cons of Decentralized Exchanges
Liquidity issues
The majority of cryptocurrencies are controlled by CEXs, which means that they control most of the trading volume, leaving DEXs with fewer options. This means that traders using DEXs are unable to buy and sell as they want due to low volume.
Complex
DEXs are not for beginners. They require users to have a deeper understanding of the market, the platform, and the process, which can be quite complicated. They also require users to always remember their private keys and passwords.
No fiat support
DEXs do not support fiat transactions.
Conclusion
Ultimately, your choice between a centralized and decentralized exchange is dependent on your expertise, how much you want to spend on fees, and how much you would like to control your funds.
Disclaimer: Investing can be quite a wild ride – especially when you don’t know the terrain! To keep things from getting too rocky, take some time beforehand to get familiar with all of the risks involved. Our site is here to up your investor game by providing all available intel about platforms and trends, but we don’t take responsibility nor can we be held accountable as advisors. That being said, it’s still important for you to make educated decisions that match what works best for YOU – just remember: no amount of savvy will guarantee success or protect against loss so invest money you can spare.
