Centralized Exchanges vs Decentralized Exchanges (DEX)

(This article is not financial advice. Ensure to do your research before putting in your money in crypto)

TL;DR

Both exchanges facilitate the trading of cryptocurrencies.

Centralized exchanges are operated by a central company which facilitates the trades. But decentralized exchanges (DEX) facilitates the trade directly between two individuals without the need of an intermediary.

What is a Centralized Exchange?

A centralized exchange is a trading platform where you can buy bitcoin and other cryptocurrencies. The exchange is owned by a company that acts as an intermediary to facilitate the trades. 

Examples of centralized exchange include: Coinbase, Binance, Gemini etc.

How does it work?

Suppose you want to buy a coin on Coinbase. When you place an order, it will match you with the seller(s) willing to sell at the price you want to pay.

For providing such services they collect trading fees from you. The fees are usually a small fraction of the amount traded.

The company operating the exchange governs the operations centrally.

These exchanges adhere to government regulations. Processes like know your customer are required before you can start using such platforms. 

Advantages

Beginner-friendly:

The user interface is easy to understand. Mobile apps of such exchanges are also available for you to buy coins on the go. Beginners can easily start buying their favorite coins using fiat currencies like USD. 

Customer support:

There is a dedicated support team to help you resolve your queries in case you get stuck somewhere while using the exchange.

Due diligence of listed coins:

Although such exchanges offer limited coins, the coins are listed on the exchange with due diligence.

Disadvantages

Censorship:

The exchanges are operated by a central company. So they can ban you from the exchange or add restrictions to your trading account.

Vulnerable to hacks:

The companies running these exchanges take considerable security measures to keep them safe. But still, they can get hacked, and you may lose your funds. It is also possible that some bad actors might mismanage your funds.

One such event was the hacking of centralized exchange Mt. Gox. Hackers stole 740,000 bitcoin from the exchange.

What is a Decentralized Exchanges (DEX)?

Such exchanges are not owned by any single entity.

They operate in a peer to peer mechanism. They eliminate the need for a central company to approve the trades on behalf of the buyer and seller.

Unlike centralized exchanges, there is no KYC (know your customer) process needed before you can start using them. 

Examples of centralized exchange include: Uniswap, Sushiswap, 1inch

Advantages

Custody of your coins:

In a centralized exchange, the exchange takes care of your coins. But in a decentralized exchange, you have to take care of your coins. Before being able to trade in such exchanges, you need to set up your crypto wallet. 

While this setup is difficult, it has few advantages. You might have come across the saying “Not your keys not your Crypto”. The centralized exchanges may mismanage your funds or get hacked. Having custody of your coins can help you avoid such events.

Lot of coins to buy from:

Decentralized exchanges offer a lot of coins to trade. You will find tokens that are not listed on the centralized exchanges. Uniswap offers a lot more coins than coinbase to trade.

Lees fees:

The fees are on a per-trade basis and are usually much lesser than the centralized exchanges.

But during peak hours the fees can be very high. Due to a lot of traffic, those who pay higher fees can get their transactions prioritized.

Censorship resistant:

Decentralized exchanges are based on blockchain. A Blockchain is distributed and there is no central authority. So no one can stop you from using these exchanges. 

Disadvantages

Illiquidity:

The trading volumes of decentralized exchange tend to be less than the centralized ones. You may have to wait for quite sometime before your order gets executed.  

Unverified Coins:

These exchanges don’t have the level of due diligence of centralized exchanges before listing a coin on the exchange. So there are a lot of unverified coins as well on the platform which might turn out to be scams.

No customer support:

Decentralized exchanges usually have a lot of community support. But there is no dedicated customer support. So in case you get stuck somewhere in the exchange you will have to sort it yourself with the help of support forums.

Not beginner-friendly:

The user interface is not feature-rich like the centralized ones.  

There is no option to buy crypto using fiat currency like USD. So you need to already have crypto to be able to buy another crypto on a decentralized exchange.

Conclusion

Decentralized exchanges stay true to what cryptocurrency stands for i.e. Decentralization. 

But centralized exchanges are beginner-friendly. A beginner might not want to have custody of their coins. They may find it difficult to set up a wallet and safeguard their coin. 

Centralized exchanges act as a gateway into the world of crypto using fiat currency like USD enabling beginners to buy Crypto.


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