Once somebody is starting to dive into the crypto world, the main focus is usually aimed at Bitcoin or Ethereum. It’s not a secret for everyone that the easiest way to do that is via major exchanges like Coinbase or Binance. However, continuing to explore the niche, people also face exchanges such as Uniswap.
Many people say that, for example, Uniswap is meeting crypto ideals more. On the other hand, the experts tell Coinbase and others are much more convenient for the users, as well as provide more to trade.
Where’s the truth? What are centralized crypto exchanges? What is decentralized exchange? What is the main difference between them? How do they actually work? If you’d like to get the answers to all of those questions, we’ve got some great news for you – today’s article will tell you everything you need to know about the following rivalry: centralized vs decentralized cryptocurrency exchange. Just read carefully and let’s get to the point!
What is a crypto centralized exchange?
So, let’s start with the main question – what is actually a crypto centralized exchange?
CEX (centralized exchange) is an exchange that has a middleman who conducts and controls trades, as well as handles the assets. Anytime you’re swapping on centralized crypto exchanges, the coins aren’t transferred directly between you and the other person. Instead, the exchange operates the trade.
Let’s consider a perfect example. Just imagine that you’re living in the countryside, where people don’t use money – instead, they’re trading goods. If you’re growing potatoes, you might also make a kind of a swap: give some potatoes to the cow farmer for milk.
One day, a group of villagers opens a market in the village square. It gives you an undeniable advantage: such a place works 24/7, helps with a more organized exchange of goods, provides safety, and allows you not to worry if your potatoes weren’t exchanged. The villagers who opened the market, in turn, also own it, which means they generate income from each trade people make.
So, you’re giving the potatoes to the market, and getting milk. As soon as the cow farmer requires potatoes, they’re heading to the market to trade.
However, there is one key difference you should remember: in the crypto world, you aren’t able to take your potatoes and milk (aka crypto assets) home and keep it in the safe. Even though you own the assets, it remains in the market in a safe with your name on it.
What is a decentralized crypto exchange?
Now, let’s move on and deal with the following – what is a decentralized exchange?
Decentralized exchange (DEX) is a type of exchange, which, in turn, doesn’t have third parties. In this case, instead of entrusting your assets to a third party such as a bank, you’re holding it on your own.
How does a decentralized exchange work?
After we’ve learned what decentralized cryptocurrency exchange is, let’s take a closer look at the next question connected with decentralized crypto exchanges – how do they actually work?
Let’s get back to our village. Actually, the difference lies in the following: instead of a centralized market in the village square controlled by a specific group, we can see a huge automated safe that nobody manages. It means that you’re allowed to take from the safe as much as you give, depending on the current potato/milk costs.
Therefore, anytime you’re willing to take a required good, you’re heading to a huge safe, do the transfer, take the goods back home, and keep it your personal safe.
Why build a decentralized exchange
If we speak about the benefits of crypto decentralized exchanges, we recommend you take a look at the small list below. There, you’ll find all the necessary information:
- Decentralized exchanges provide their users with liquidity,
- They don’t require KYC and work 24/7,
- A decentralized crypto exchange gives you yield farming opportunities, which help facilitate decentralized swapping (or trading) of digital assets in exchange for a small fee.
- The smart contract code is open and transparent. Thanks to this, crypto natives are able to simply verify the code instead of trusting a centralized business to be solvent.
Why should we ignore centralized exchanges, if they’re also mostly reliable, you may ask? Actually, everything is straightforward: even though centralized exchange crypto works almost the same as the crypto decentralized exchange, DEXs provide the services in an anonymous and trustless manner. Nowadays, the technology allows it to exist outside of any regulated industry and expands access to those financial services for everyone.
DEX vs. CEX
Here’s the key point of today’s article – the confrontation: centralized vs decentralized exchanges. So let’s take a closer look at the main differences between them, as well as at the advantages and disadvantages.
- Crypto Asset Diversity. As of 2021, there are more than 4,000 different cryptocurrencies in the market. The key difference is the following: to get on a CEX, an asset has to satisfy security protocols, have trading activity, and meet legal standards; on a DEX, in turn, you can list anything.
- Security & Privacy. In a CEX, there is just a little risk you could face a scam. It means that it’s not probable you’ll exchange potatoes for milk, and when you’re home, you notice it’s water instead of milk. The situation with DEX, in turn, is a bit different – if you get scammed, there is no way to solve such a problem.
- Technological Maturity. While CEXs use a special technology that’s more stable and has much fewer hiccups and bumps for the end-user, DEXs suffer from the one slight problem – scalability. However, since blockchain is a pretty rapidly evolving technology, the restrictions DEXs are facing will soon become less significant.
Which one to choose
Speaking about our rivalry – centralized vs decentralized exchange – we cannot ignore the question of what’s better.
While the centralized exchange is more convenient for users and theoretically safer, a decentralized exchange is a new technology that might become a standard in the future.
However, if you’re trading Bitcoin and other crypto assets, you’re probably more interested in making money today or tomorrow, not in what will happen in 10 years.
In short, CEXs are a secure introduction into the crypto sphere, especially if we speak about the short-term benefits. DEXs, in turn, is a more risky place, but there, you’ll be able to receive higher awards if you’re playing the game right.
Besides, if you’re used to swap tokens often, we’d like to give you one helpful tip. Our Droidex aggregator offers its users the best rates among the major DEXs with top trading efficiency. So if you want to see the process is fast and safe, we recommend you visit our official website to learn more about all the Droidex’s features and advantages.
Otherwise, if you decide to use CEX, we can recommend you using Fiatom fiat-to-crypto aggregator that will help you choose an exchange with the best rate and lowest fees on the market completely free.
A bit about Verge Wallet offline. Also, if you’re looking for the best crypto wallet currently, pay attention to the Verge Electrum Wallet – a wallet that provides you with one of the best confidential-focused features, as well as one of the quickest transactions among its competitors.
Summing it up
Actually, if we return to our centralized exchange vs decentralized exchange confrontation, here’s what we need to conclude: even though both exchanges have something in common, the way they work is quite different. Respectively, people use DEXs and CEXs for different aims, depending on what they’re striving for.
Just remember one golden rule and try to keep it in mind, no matter if we’re speaking about our rivalry – decentralized exchange vs centralized exchange – or something else: never invest in something you’re not ready to lose. Otherwise, you’ll end up with the potatoes you were growing up carefully and with a sack of spoiled milk and rotten cryptos.