Centralized Exchanges Vs Decentralized Exchanges

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.

What Are Cryptocurrency Exchanges? 

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.

Learn more about the role centralized exchanges play in funding wallets to purchase and trade NFTs.

What Are Centralized Exchanges?

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. 

Traders like this!

Even though it is reported that 99% of all crypto transactions pass through centralized exchanges, there are some decentralized exchanges that are as big as centralized exchanges.

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.

How Do Centralized Exchanges Work?

How Do Centralized Exchanges Work?

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.

Advantages of Centralized Cryptocurrency Exchanges

  1. Easy to use: Beginners who wish to trade or invest in cryptocurrencies can do so with ease through centralized exchanges. They offer a familiar, friendly environment to do so. Centralized exchanges allow users to login to their accounts, view balances, and make transactions through apps and websites, instead of using crypto wallets and peer-to-peer transactions, which can be complicated.
  2. Reliable. Centralized exchanges provide a buffer of security and reliability for those transacting and trading. Plus, the centralized platform offers higher comfort levels and facilitates smoother transactions. 

Disadvantages of Centralized Cryptocurrency Exchanges

  1. Thieves and hackers: Centralized exchanges — while offering reliability and some security for traders — are vulnerable to hackers. This is because they are operated by single entities. These companies are responsible for the holdings of their clients. Larger centralized exchanges can hold billions of dollars worth of cryptocurrency. This makes them a prime target for hackers and thieves. A classic, often retold incident is that of the unfortunate Mt.Gox — once the biggest exchange company in the world — until it lost 850,000 bitcoins, leading to its suspension.
  2. It can be expensive: Much as we love how easy it is to use centralized exchanges, they often make you pay high fees for convenience of using their services. Their transaction fees can be particularly high when trading in bigger amounts.

Learn more about the top ten cryptocurrency wallets for Cardano users here!

Top Centralized Exchanges List

Top centralized exchanges list

Here are the top centralized exchanges, according to traffic, liquidity, and trading volumes:

  1. Binance
  2. FTX
  3. Coinbase (Pro)
  4. Kraken
  5. Binance.US
  6. KuCoin
  7. Gate.io
  8. Bitfinex
  9. Huobi Global
  10. Gemini

Check out the overview and specs we’ve done of a few of these top centralized exchanges on Cardano!

What Are Decentralized Exchanges?

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. 

How Do Decentralized Exchanges Work?

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.

Are Decentralized Exchanges Legal?

Are Decentralized Exchanges Legal?

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.

Advantages of Decentralized Exchanges

  1. Relatively hack-proof: Since DEXes do not transfer assets via a third party, there is no risk of a middleman company being hacked. This means DEX users are assured of safety.
  2. Fairer market: This is because decentralized exchanges facilitate the peer-to-peer exchange of cryptocurrencies. The exchange is not trading against you, nor do they use proprietary trading data to beat you. In so doing, users are protected from fake trading and wash trading.
  3. Privacy: Another tremendous plus of decentralized exchanges is that there is no need to complete know-your-customer (KYC) forms. This gives users the ultimate in privacy and anonymity.

Disadvantages of Decentralized Exchanges

  1. It's pretty complicated: While it is not rocket science, DEX users need to remember things like the keys and passwords to their crypto wallets. If they don’t, they could lose their assets forever. Plus, unlike CEXs, users need to learn and get comfortable with the not-so-user-friendly platforms and the process. However, the UX is improving, so watch this space.
  2. Smart contract exploitation: While DEXes cannot be hacked or stolen, there is a risk of smart contracts being exploited. Recently, DEX aggregator had to reimburse approximately $600K to the 29 people whose wallets were exploited.  
  3. No fiat payments: You cannot trade fiat currencies for digital currencies on decentralized exchanges. This makes it difficult for you if you don’t already have cryptocurrencies.
  4. Low volumes: Trading volume, or the lack thereof for DEXes, is a big thing. Because CEXs have the monopoly on transactions, decentralized exchanges often lack liquidity. What does this mean for you? It may be a challenge to find buyers and sellers in low-trade volume moments.

Top Decentralized Exchanges

Top decentralized exchanges

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.

Centralized Exchanges Vs Decentralized Exchanges: Summary

Here's a high-level overview of what we’ve just discussed.

Centralized Exchanges Vs Dentralized Exchanges

A Final Thought

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.