Choosing the proper cryptocurrency exchange is essential for any trader. In some cases, it’s the only way to obtain new tokens or withdraw hard-earned money to fiat. However, it’s not as easy as sending money on Wise or Venmo.
There are two types of crypto exchanges: centralized and decentralized. Each of them has their benefits and drawbacks. It’s vital to understand which one suits your needs more.
Centralized crypto exchanges are great for beginners and experts, but they have a single authority point that compromises anonymity. Decentralized options provide more privacy with lower fees, but they are far more complicated than its rivals.
In this article, I’ll have a deep dive into both options to provide you with an in-depth review of both exchange types. I strongly recommend you test both. That is the only way to find out who will be a winner of centralized vs. decentralized crypto exchanges in your case.
Centralized Exchanges (CEX)
Centralized exchanges (CEXs) facilitate crypto trading while acting as intermediaries, like the bank. Those companies handle trading aspects, including next:
- Book ordering. In the crypto world, books are lists of trade orders for a chosen cryptocurrency. CEXs with book orderings show traders the current market depth and liquidity for a particular coin.
- Fiat currency support. CEXs allow the fiat onramp by exchanging USD and EUR. Traders can buy tokens using their credit cards and convert their profits into fiat.
- Margin trading. Some centralized exchanges offer margin trading, allowing traders to borrow from the exchange to increase trading power. It’s a risky strategy for exchange (a potential investor may disappear) and investors (they may lose their money due to crypto volatility). It can also lead to higher profits.
The centralized cryptocurrency exchanges act as liquidity hubs and crypto bridges, facilitating the swift exchange of cryptocurrencies. High liquidity is essential for traders to implement their buying strategy.
Centralized exchanges are a great starting point for crypto newbies. CEXs provide a familiar environment, similar to stock exchanges, making it easy to withdraw fiat. They are useful instruments for experienced traders. Some of the most popular CEXs are Binance, Coinbase, Kraken, FTX, and Gate.io.
However, there are plenty of risks associated with CEXs. Centralized exchanges in crypto are vulnerable to hacks and other security breaches. Additionally, CEXs can freeze or confiscate user funds if they suspect illicit activity from a user.
Key Features and Considerations Related to CEX
Centralized exchanges have several features that set them apart from other crypto trading platforms. These are liquidity, a user-friendly interface, security specifics, and regulatory compliance. These features are essential to understanding the role and potential impact of a centralized exchange in the cryptocurrency ecosystem.
Crypto liquidity refers to the ease of token trading without impacting its market price. This parameter is crucial for traders since it allows them to quickly evaluate a chosen token and predict its volatility in the foreseeable future.
Centralized crypto exchanges (CEXs) are vital for providing liquidity for decentralized markets. They maintain order books that list, allowing traders to evaluate the current market depth and coin liquidity. CEXs are also known for their ability to increase token liquidity with the next methods:
- Market makers. They are professional traders placing orders on both sides of the market to create liquidity. CEXs often pay market makers for their jobs.
- Liquidity mining. It is a process where users get rewards in the form of tokens for providing liquidity to a pool. Centralized exchanges often use liquidity mining, encouraging users to deposit their funds into CEX order books.
- OTC trading. Over-the-counter (OTC) trading is peer-to-peer trading without the exchange as a full-scaled intermediary. CEXs offer OTC services to institutional investors and large traders.
CEXs are also known for their tighter spreads with fast order execution: traders can exchange crypto at closer prices to the market value. Traders will face a higher profit. It increases the chances that they come back to the same exchange and increases its liquidity.
Due to these efforts, CEXs offer higher liquidity than decentralized exchanges (DEXs). It leads to more stable prices, reducing the risk of extreme fluctuations and money laundering.
2. User-Friendly Interface
A user-friendly interface (UI) is important because it eases the interaction process with DeFi services. A good UI should be clear, concise, and easy to navigate. Centralized exchanges offer simple order placement, intuitive design, and clear and concise language that is easy to understand.
CEXs are known for their intuitive interfaces, providing accessibility to a broader audience. These platforms provide intuitive trading tools: charts, order books, trading pairs, etc. That way, centralized exchanges make investment opportunities fair to everyone: whether you have $100 or $1 Million worth of assets.
Many CEXs offer educational materials and customer support to help users learn about cryptocurrencies and trading strategies. They have blogs, Wiki pages, webinars, and even trading academies to educate users.
For instance, Binance is famous for its Binance Academy where users can learn about crypto for free. Coinbase has a YouTube account with 75K+ subscribers where they share the latest crypto updates with users.
User-friendly UI makes the user experience more enjoyable, reducing potential errors and increasing trust by demonstrating the service features. It eventually leads to the increasing adoption of the most user-friendly centralized exchanges.
Technically, tokens are just files that can get stolen from the wallet. Thus, centralized exchanges need to provide extra security measures like security audits by third parties to ensure that the service's security measures are effective.
Some CEXs use hardware security modules (HSMs) to store private keys. Other exchanges store a portion of their users' funds in cold offline storage less vulnerable to hacking.
Many CEXs provide multi-signature wallets to make the sending process even more protected. Multisig wallet users need to collect a certain number of co-signs to initiate the transaction.
CEXs monitor user transactions for suspicious activity. For instance, a centralized exchange might flag a large withdrawal from an account that has not been used in a long time. They also can scan each transaction with AML tools (anti-money laundering) and block users with illicit funds in their wallets.
But remember, no security measure is perfect. There is always a risk that criminals may hack CEX or compromise your account. However, by implementing the latest security measures, CEXs reduce the risk of theft.
4. Regulatory Compliance
Crypto is still an underregulated industry at the beginning of its journey. It’s crucial to pick the services that try best to maintain high regulatory compliance levels. Centralized exchanges are far more regulated than decentralized organizations.
Due to its centralized nature, it’s easier to set regulations on CEXs: they have a single control point that can set rules for every platform user. Centralized exchanges are committed to regulatory compliance. They try their best to fit into the laws of every country where they officially work. It includes KYC (Know Your Customer), AML (Anti-Money Laundering), and tax regulations.
CEXs report suspicious activity to regulators, which makes them a place for law-abiding users. Centralized exchanges often cooperate with regulators, helping them to create laws that will be fair for every party involved.
Binance is one of the largest CEXs. They are registered in multiple jurisdictions, including the Cayman Islands and Malta. Coinbase is also a multi-national company registered in several countries, including the US and the UK. CEXs all stick to the GDPR, implement KYC and AML procedures, and report suspicious activity to local and international regulators.
Decentralized Exchanges (DEX)
DEXs are another fundamental part of the cryptocurrency ecosystem. Here users trade tokens directly with one another, without intermediaries. Decentralized exchanges rely on blockchain and smart contracts. Their primary role is to empower users by providing greater control, privacy, transparency, and lower fees than in CEXs.
1. User Control
User control is an important aspect of crypto services. Some users desire control over their funds. Traditional finance institutions and even centralized crypto exchanges can’t provide it to them, so they are starting to look for decentralized services.
DEXs provide full user control, allowing them to keep funds in their wallets and connect to the DEX to trade. Users do not need to deposit funds into the service’s hot wallet. They can keep their funds in their wallets.
Many DEXs are open-source: anyone can audit the code. Users can check the transaction history of each other. It reduces the risk of fraud and manipulation.
Keep in mind that DEXs are a relatively new technology, so there are still risks associated with it. DEXs are often more complex: you face more risks of losing your funds over the failure.
Privacy is a vital aspect of the crypto industry: users tend to use services that allow them to exchange their money without revealing their identity.
Identity theft is another major problem in the traditional financial system. DEX usage reduces the risk of user identity theft. Traditional financial businesses may discriminate against customers based on their financial information or nationality. By using a DEX, users can protect themselves from this discrimination.
The traditional finance industry often doesn’t reveal background processes, confusing users, traders, and potential investors. The DeFi industry is based on transparent blockchain technology, making the financial industry more inclusive.
At the same time, DEX users need to stick to the regulations since other users can easily track down potential illicit activities with AML tools that work even with fully anonymous wallets. Those tools track transaction history, marking potentially illegal transactions.
4. Lower Fees
Commissions are the key moment in the battle between decentralized vs. centralized crypto exchanges. Traditional financial institutions and CEXs often charge for their intermediation.
Decentralized exchanges don’t need to cover the cost of operating a centralized authority point: they rely on users to provide liquidity. Thus, DEXs can provide the lowest transaction fees on the market. They don’t process orders through a central server.
All transactions on DEXs are processed directly between users on the blockchain. Decentralized exchanges also offer incentives to users who provide liquidity to the exchange. It reduces trading costs and fees for all DEX’s users.
Many decentralized exchanges have no listing fees, allowing users to list new tokens without requiring substantial fees or approval processes. It fosters a more open and inclusive trading environment. Direct trading between users leads to tighter bid-ask spreads, reducing the cost of arbitrage and benefiting traders.
For instance, Uniswap charges a fee of 0.3% on all trades. PancakeSwap. a DEX on the Binance Smart Chain charges a fee of 0.2%. Most centralized crypto exchanges ask for a 2-4% fee.
Centralized vs. Decentralized Crypto: What's the Difference?
Centralized exchanges (CEX) have a single authority point that acts as an intermediary between users. CEXs are user-friendly services that offer free courses to broaden users' knowledge. It leads to a constantly gaining popularity. As a result, CEXs provide more liquidity, reducing the risk of extreme fluctuations.
But nothing is perfect. So, you eventually may ask yourself questions like “What are the major downsides of centralized exchanges? Why are decentralized options more financially beneficial?”. It’s completely natural.
Centralized exchanges often compromise user anonymity by asking to provide personal info, including full name and credit card number. Due to partial centralization, CEX’s users face high custodial risk. Users entrust their funds to the exchange, making them vulnerable to hacking or insolvency.
On the other hand, decentralized exchanges (DEXs) don’t have a single authority point that lowers trading fees for both parties. DEXs empower users with full control over their funds. Those exchanges don’t require personal information, preserving user anonymity.
At the same time, decentralized exchanges are far more complex than centralized options. Here users need to manage their private keys and wallets with extreme caution, checking every potential transaction. If they fall into a phishing trap or accept illicit funds, they may lose their wallet.
Due to those risks, they have poor adoption, leading to lower liquidity and limited asset selection. But despite all obstacles, they slowly yet surely gained new clients and increased the service’s liquidity pool.
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