What are the differences between centralized exchanges vs decentralized exchanges for buyers and sellers of cryptocurrency?
In this article, we’re going to unpack the differences and pros/cons of these types of exchanges as well as share lists of the top exchanges today to help traders have the least exposure to risk, and greatest potential for returns.
Let’s jump right into it.
Cryptocurrency exchanges (both decentralized and centralized) are platforms that allow you to trade cryptocurrencies for other assets.
These include digital currencies as well as fiat currencies, but currently, do not include trading NFTs — these are reserved for NFT marketplaces.
Essentially, these exchanges act as a go-between for the person buying and the person selling. Exchanges make their money by charging commissions and transaction fees.
Centralized exchanges (CEXs) function as a broker or go-between for buyers and sellers. Operated and controlled by one entity or company, centralized exchanges offer stability and reliability.
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The purpose of centralized exchanges is to allow users to buy and sell cryptocurrencies for fiat currencies like the US dollar, or for digital assets like ADA, Bitcoin, and Ethereum.
These entities that run the centralized exchange of your choice should safeguard your money, and act as trustworthy brokers in deals.
However, this is not always guaranteed.
Centralized exchanges operate much like a real-world stock exchange or marketplace does. Think of the New York Stock Exchange, or London Metal Exchange.
In the same way, albeit in the fintech context, these centralized exchanges facilitate high volume trade of an asset.
So, how do they do it?
Centralized exchanges usually keep digital records or order books. These books or lists keep track of open buy and sell orders, which include volumes and prices.
They match buyers with sellers, and declare the current market prices which is determined by the latest price an asset sells for.
Here are the top centralized exchanges, according to traffic, liquidity, and trading volumes:
Check out the overview and specs we’ve done of a few of these top centralized exchanges on Cardano!
Decentralized exchanges (DEXes) are a non-centralized alternative to centralized exchanges.
So, what does this mean in human-speak?
Basically, there is no “single entity” that is in charge of all the assets or transactions.
As opposed to CEXs, decentralized exchanges allow users to keep control of their assets.
How do they do this?
By running their important activities on the blockchain. Also, decentralized apps and smart contracts automate transactions, unlike traditional centralized exchanges.
First, a token owner will place an order on the decentralized exchange of their choice. The instruction will be to swap their assets for another asset.
For each token, it is the owner who establishes how many units are to be sold, and the value of the token
Then, the moment the seller sets the duration, they engage with potential buyers to directly evaluate and engage with all offers.
Others are then also able to place a purchase order and submit bids after the selling order has been submitted.
Well, this is a good question, and the answer (unfortunately) is varied. It really depends on where you are, and what you want to buy.
For example, in the US, people are banned from using DEXes in a few states.
More and more decentralized exchanges are falling under the heavy gaze of the Securities and Exchange Commission (SEC), seeking out compliance issues, lack of transparency, and so on.
Also, if you want to get your hands on certain cryptocurrencies like Monero and Dash tokens, you can only do so via decentralized crypto exchanges. This is because these cryptocurrencies cannot be listed on government-approved exchanges.
The big question then is, are decentralized exchanges safe?
Let it be said that there is always an element of ‘risk’ with decentralized exchanges. This risk is not as much from a hack or theft perspective, but from a liquidity and investment point of view.
While DEXes are more affordable and offer great privacy benefits, you simply don’t get the level of protection offered by entity-owned centralized exchanges.
For this reason, many investors prefer to pay for the security offered by a centralized exchange.
Here are the top decentralized exchanges, according to traffic, liquidity, and trading volumes:
Check out the overview and specs we’ve put together of some of these decentralized exchanges on Cardano.
Here's a high-level overview of what we’ve just discussed.
When it comes to determining who wins in the future — CEXs or DEXes - you have to decide for yourself. If you want an easier trading platform at high volumes that accepts fiat payments, then centralized exchanges are for you.
However, if privacy and more affordable trading floats your boat, then decentralized exchanges may be the way to go.
In our opinion, we believe that both centralized and decentralized platforms serve a purpose in the greater ecosystem and will continue to help bring mass adoption to the crypto space.