If you are a cryptocurrency trader or a Bitcoin futures trader , it is important to understand the difference between a decentralized and centralized exchange.
What is a cryptocurrency exchange?
Before we move on to explaining the concepts of convergence and decentralization, let’s briefly examine what a cryptocurrency or derivatives exchange is.
One cryptocurrency exchange is a platform that allows you to buy and sell a variety of virtual currencies. Therefore, a trader would design their strategy based on which currencies appear to be increasing in value and which ones are falling. The goal is to either make a profit on each trade or hold onto a currency until the price increases to the desired amount.
Similarly, a derivatives exchange also allows you to buy and sell assets. However, instead of dealing with cryptocurrencies directly, you deal with contracts that derive their value from an underlying asset. For example, the BTCUSDT contract from Binance or Kucoin follows the price of Bitcoin. Bitcoin futures trading allows you to open positions in an attempt to profit by predicting whether the price of Bitcoin will rise or fall without having to hold Bitcoin.
what is a Centralized cryptocurrency exchange How does it work?
Centralized exchanges are trading platforms that can be compared to brokerages and stockbrokers in terms of the way they operate. They have been responsible for maintaining much-needed liquidity for the cryptocurrency markets, as they have made cryptocurrencies much more accessible to the masses.
Centralized exchanges are operated by multiple companies that maintain complete control over all transactions, as well as users' private keys and transaction details. portfolios of their exchange accounts. This brings us to the main criticism of centralized exchanges, namely that users must go through specific, company-approved methods to handle their funds and the transactions involved.
In recent years, several cryptocurrency exchanges have been hacked, resulting in millions of dollars lost (main examples are Binance, Upbit, Bithumb, cryptopia, etc.). Not only that, but centralized exchanges are also prone to government bans, and often have poor support sections (even though most exchanges are actively working on solving this problem).
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However, by far the biggest “problem” with centralized exchanges is the required compliance with the KYC and the implicit sending of identity documents. This opens the door to the possibility of identity theft and even leaking of personal identity information.
What is a Decentralized Cryptocurrency Exchange? How DEXs work
Decentralized exchanges are much more in line with what Satoshi envisioned, as no company operates these DEXs, as they are commonly referred to. In fact, decentralized exchanges operate with the help of the same technology that powers most cryptocurrencies, namely blockchain so the DEXs are considered the exchanges of the future . These exchanges do not hold customers' cryptocurrencies and do not store sensitive information.
Since they are entirely blockchain-based, it follows that decentralized cryptocurrency exchanges suffer from most of the inherent disadvantages of blockchain, the main one being scalability. Therefore, most decentralized exchanges are slower than centralized exchanges. Not only that, but they are also arguably less user-friendly when compared to their centralized counterparts.
However, as technology advances, decentralized exchanges are likely to improve. Liquidity levels will increase and user experience will improve mainly due to technologies such as smart contracts, off-chain atomic swaps, and on-chain atomic swaps.
Decentralized vs Centralized Exchange: Real Differences Between CCEs and DEXs
The most obvious difference is the overall popularity levels. At the moment, DEXs are much less popular than their centralized counterparts. This means that when it comes to trading volume, CCEs are also the leaders of the pack. CCEs also have better liquidity. Another major difference is that DEXs accept crypto payments and exclusively exchange cryptocurrencies, while CCEs also tend to allow crypto-to-crypto exchanges, as well as supporting direct bank transfers and credit/debit card payments.
On the other hand, since their nodes are distributed, DEXs generally have a lower risk of hacks. The same can be said about government actions, as DEXs are immune to government mediation. DEXs also have an advantage when it comes to the level of privacy they provide. All transactions are anonymous, while on CCEs, there is an increased risk of identity theft and hacks. All cryptocurrency to fiat exchanges are mostly done on centralized exchanges. This is mainly because EUR and USD (all other fiat currencies) are also centralized.
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Conclusion: decentralized or centralized exchanges
Choosing between a centralized or decentralized cryptocurrency exchange is not a difficult situation. Since Both types of exchanges have undeniable advantages and both have notable disadvantages. Nowadays, it is simple that the centralized exchanges provide more utility and functionality to their users. The structure of the cryptocurrency ecosystem remains, at least for now, unchanged. Centralized exchanges are still king in terms of daily trading volumes and the most preferred by users are Binance, Kucoin, hitbtc.
However, decentralized exchanges will soon be able to hold their own against their centralized peers. As technology advances, decentralized exchange UIs will continue to improve, the options for trading pairs will grow, and soon the differences between centralized and decentralized exchanges will become less apparent.
One thing is for sure, security is becoming a very strong focal point for most cryptocurrency-related exchanges. Therefore, improved security will certainly be a very good incentive for volume adoption purposes. In short, security will be a very attractive selling point for decentralized exchanges.