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Centralized and Decentralized Exchanges – Which One To Choose?

By:
Carl Cotton
Updated: Mar 1, 2020, 13:53 GMT+00:00

There are more than 200 cryptocurrency exchanges to trade on. Based on their type of operation, we can classify them into centralized or decentralized. While there are so many things to understand in the blockchain, it’s also important to grasp the concept of centralization versus decentralization. So, what exactly is a centralized or decentralized exchange?

Centralized and Decentralized Exchanges – Which One To Choose?

Cryptocurrency has brought power back into the hands of individuals. With the possibility of eliminating the third-party involvement in transactions, the digital currency has made palpable growth since its introduction in 2009. As a currency which is almost impossible to duplicate, it holds enormous value in this digital age.

There are more than 200 cryptocurrency exchanges to trade on. Based on their type of operation, we can classify them into centralized or decentralized. While there are so many things to understand in the blockchain, it’s also important to grasp the concept of centralization versus decentralization. So, what exactly is a centralized or decentralized exchange?

What is a Centralized Exchange?

Let’s put it this way, centralized means that there’s a single point which does all the work involved in any given operation. Take Google, their platform needs all the data to enter and leave through a central hub. Which means you can’t send or receive any information without it going through a single point.

That is how a Centralized exchange work. The platform offers an efficient trading environment at the cost of user’s privacy and personal information. The cryptocurrency data gets transferred through a network including passwords and get stored on a centralized server. These pieces of information are sometimes shared with the government due to regulations.

This doesn’t go well with the very concept of cryptocurrency which demands complete anonymity and safety. Also, these kinds of exchanges are vulnerable to attacks, bans, and lack of privacy. Otherwise, you can compare these type of business models to the traditional securities exchanges or even banks.

Although they are vulnerable up to a certain extent, they helped to bring cryptocurrency into the masses. It has also been essential in the formation of crypto markets that we see today. Here are some benefits of using centralized exchanges or otherwise known as CEX.

The ease of access

CEX makes 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.

They have a license

Most of these centralized exchanges have licenses and runs under government regulations. This gives the trader an assurance if something goes wrong.

Use of escrow

As a middleman in trades, they hold the currency until both parties complete their end of the bargain. Thus, there’s no need to worry about the transaction after the trade gets finalized.

Transparency

They make their address and location available to the traders. Hence, it helps the consumers to reach them if needed.

Offers and discounts

CEX also offer discounts while trading in large amounts. Also, the users can exchange fiat currencies to crypto and cryptocurrencies to fiat.

How Decentralized Exchanges Benefit Traders?

Decentralization is a type of network that isn’t operated by a central party. In other words, unlike their counterparts, their platform doesn’t need all the information to go through a single point. Instead, it’s more like a peer-to-peer network where many points connect.

This means, instead of one party being responsible for all the data and information, decentralized platforms operate on a peer-to-peer basis. By operating this way, consumers personal information are not shared as a third party has no access to the information.

These exchanges offer privacy and control over the assets by taking power away from market makers and leaders like banks, lawyers, and brokers. They also operate with the help of smart contracts.  Though there are plenty of decentralized exchanges out there, they have always struggled to rival the centralized exchanges. This is due to the technical difficulties making decentralization more accessible.

When a transaction initiates on DEX (decentralized exchange), the transaction data processed on different hard drives must get verified to achieve a secure result. This multiplies the difficulty required to complete a transaction on DEX.

The shared blockchain network remains to be the core issue in improving decentralization. We should also notice that it has been the biggest technical difficulty since the introduction of cryptocurrencies. But, the introduction of smart contracts and distributed apps can make the difference for decentralized exchanges as it offers more functionality.

Benefits Of Using Decentralized Exchanges

Privacy

Transactions made on DEX shares no data with the third party. Hence, it allows maintaining consumers information and privacy. Also, centralized exchanges ask for personal information such as email, identity proof, and phone number while signing up. DEX doesn’t need any of that.

Security

The biggest advantage of decentralization is the enhanced security it offers. The cryptocurrency got introduced for this purpose, it gives the consumer complete control over their assets.

Decentralized servers

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.


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Blockchain Companies Using Decentralized Exchange Models

Decentralization is promising a system liberated from banks, laws, and third parties. Thus, the system has the potential to bolster its growth in the next few years. Here’s a list of companies trying to solve their inefficiencies by making use of the blockchain technology. Particularly the future is promising for decentralized exchanges because they are destined to improve and innovate if they want to save the cryosphere.

Waves Dex, CryptoBridge Dex, OasisDex, Bisq (aka BitSquare), Stellar Dex are one of them but there are much more decentralized exchanges out of which few are still being built and few are facing security difficulties or still have very low liquidity.

Companies spend millions on improving decentralized apps. Yet, they are still slow, hard to use, and sometimes very expensive for consumers. Menlo One has found a solution to solve these concerns for users. They provide a reliable framework for making decentralized apps by using a reputed algorithm for enhanced performance. They are as fast as traditional web apps and offer the security of blockchain technology.

Implementing and applying the decentralized technology of the Blockchain cryptocurrency network in the alternative assets as wine industry, invests in it its future and ensures its longevity. Modern trading platforms make fine wine trading easier and more reliable than ever before. Backed up by its partner, DotChain GmbH based in Switzerland, one of such platforms, CWEX, guarantees anonymity and security of investment by providing blockchain based ownership certification to each bottle of wine traded on the trading platform. Fine wine vendors that passed a strict auditing process can list their products for trading in CWEX/EOS/BTC/ETH/NEO/USD.

Founded by Zhang Jian, FCoin is also a fully decentralized exchange with a massive volume of trades happening each day. Centralized exchanges have been ruling the crypto markets since the very beginning. However, a start-up based in China has made the headlines with its fully transparent crypto exchange.

Conclusion

To sum it up, decentralization is the core reason behind the creation of cryptocurrency. Though the centralized exchanges are benefiting the investors and the system, the true purpose of cryptocurrency will only come true with a decentralized cryptocurrency exchange.

It’s up to the individual to choose the right exchange for themselves. Centralized exchange provides the ease of access and reliability while decentralized exchange contributes to the enhanced privacy. Both has its own benefits and concerns, for now, they serve to bring crypto markets into the broad frame.

About the Author

Carl Cottoncontributor

An entrepreneur with experience in finance and journalism. Fascinated with the intersection of current digital footprints, modern entrepreneurial eco-systems, and world events

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