Exchanges are trading platforms that allow users to buy and sell cryptocurrencies and other digital assets. There are two types of exchange namely a decentralized exchange and a centralized exchange.
CEXs are owned and operated by a company that maintains total control over all transactions. Users of centralized exchanges do not have access to the private keys of their exchange account’s wallets.
This puts all of the user’s trust in the hands of the exchange operators, as transactions can only be made through the mechanisms provided and approved by a central authority. These pieces of information are sometimes shared with the government due to regulations.
Centralized exchanges operate on business models that can be likened to traditional securities exchanges or even banks. Examples of such exchanges are Binance, Bittrex, Bitmex, Coinbase, Bitfinex, Kraken, and others.
Decentralized exchanges are platforms that allow users to carry out trades without any intermediary. The custody of the users’ assets relies on the users themselves. Users have the private keys to their wallets and carry out transactions directly on the blockchain they’re interacting with. Examples of such exchanges are WhalesHeaven, TomoDex, Vitex, Loopring Exchange, Sushiswap, Uniswap, and others.
Most DEXs do not have a centralized server, they store data across various servers around the world. Hence, the data remains safe and is almost impossible to get hacked.
Differences between a Decentralized Exchange and a Centralized Exchange
1- Security: Decentralized exchanges are easily prone to attacks, bans, and lack of privacy. Most of these centralized exchanges have licenses and runs under government regulations. This assures the trader in situations where things go wrong. On the other hand, the biggest advantage of decentralization is the enhanced security it offers. CEXs give the consumer complete control over their assets.
2- Privacy: Transactions made on DEXs are not shared with third parties. Hence, it allows maintaining usersʼ information and privacy. Also, CEXs ask for KYC details such as email, identity proof, and phone number while signing up. DEXs don’t need any of that.
3- Ease of use: Centralized Cryptocurrency Exchanges make it easier for users to create an account or buy their first cryptocurrency. This helped to bring new users into the system and has also made crypto markets more popular.
4- Order Execution: Orders on decentralized cryptocurrency exchanges are executed on-chain whereas centralized exchanges make use of the assets on their balances to complete orders.
5- Liquidity and trading volumes: Centralized Exchanges have higher liquidity and trading volumes compared to decentralized ones. A centralized cryptocurrency exchange is more likely to have high numbers of buyers and sellers wanting to carry out transactions thereby providing the needed trading volumes.
6- Limited Risk: Decentralized cryptocurrency exchange users are exposed to limit the risk of exchange hacks and loss of assets. With the users holding the private key to their wallets, they are not at any risk of personal information and wallet details exposure due to hacks.
To sum it up, centralized and decentralized exchanges are key factors in achieving the goal of bringing the masses to the crypto industry.