Decentralized VS Centralized Exchanges: Similarities and Differences
One of the best features of cryptocurrencies is their decentralization. That is, cryptocurrency is not controlled. The decision-making rights are distributed to the participants of the network. They bypass a single central authority.
However, the principle of decentralization that embodies the cryptocurrency itself hasn’t yet been fully integrated into cryptocurrency exchanges. Currently, most cryptocurrency transactions are conducted on a centralized and fast cryptocurrency exchange.
What Are They?
- The centralized exchange (CEX) is a platform operated by companies that mediate the trading process. These are a kind of gateway for newcomers who want to enter the world of cryptocurrencies. Since their inception, they have made Bitcoin, Ether, and other cryptocurrencies accessible to a wide range of people and gained public attention.
- Decentralized exchange (DEX) is designed so that no third party intervenes between the parties to the transaction. Instead of collecting orders from the order book, DEX directly collects merchants who place purchase and sale orders. As a result, they have significant benefits for users. Transaction fees are low because there are no intermediaries.
What Are the Risks?
Cryptocurrency trading involves dangers, no matter what exchange you use. Yet, the dangers posed by these two types of trading exchanges are different.
- Hacking poses a real danger to users of CEX who keep their funds on servers. Of course, such situations have happened before. Still, it can also happen today, especially on small exchanges.
- CEXs are subject to financial changes. It may happen in one hour, creating some risks for coins in your wallet. In addition, your funds may be frozen or even grabbed if an exchange is under investigation.
- These platforms usually demand you to prove your identity. In the unlikely event of a leak, they may put up your identity for sale. As a result, your data can be subjected to hacking, fraud, and identity theft.
- DEX is not a custodian, so only you can manage your funds. But if you forget your wallet recovery phrase. That’s why you have to keep your keys in you will lose your cryptocurrency in a safe place.
- Decentralized platforms are created using smart contracts. So, some risks are associated with the code. In short, hackers can exploit bugs and vulnerabilities in the trading platform code. Unfortunately, this was often the case in the early days of the 2020 DeFi boom.
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Summary of the Comparison
The choice of the platforms depends entirely on the purpose and experience of the trader. It is common for advanced users to use both CEX and DEX, depending on the situation and purpose. They can swap LTC to ETN or other coins on both exchanges.
For beginners who want to buy cryptocurrencies with fiat money or invest in popular altcoins, the easiest way is to use the centralized market, which is convenient for them and available in their country. CEX is also suitable for traders who want to pay taxes on their transactions. Some centralized exchanges can help you prepare your report. But keep in mind that centralization means the exchange has full control over its currencies.
If you still want to trade tokens with little capital, DEX is a good option. It offers greater privacy because it doesn’t require the personal information or identity verification of users who trade on such platforms. Disclosure of identification is required only for business partners.
The security of decentralized exchanges is greatly enhanced by the fact that these platforms don’t store users’ cryptocurrencies but simply connect the parties directly. In other words, no server can be hacked, and no one can steal the private key.
But it is important to understand that decentralized platforms aim at more experienced users who are unsatisfied with simple spot trading.
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