A few months ago, Ethereum co-founder Vitalik Buterin uttered quite a heavy rhetoric against centralized exchanges. “I definitely hope centralized exchanges go burn in hell as much as possible,” he said in an interview with TechCrunch.
Granted, his statement may have stemmed from frustration amid multi-million dollar hacks happening left and right, as if there was a competition over who can out-meltdown the other based on the number of damages. But of course, this fanned debates and incited some reaction from centralized exchanges.
But emotions aside, both decentralized and centralized exchanges have their benefits and downsides.
Like with many technologies, completely dismissing one just because everybody says so is not a practical move for cryptocurrency holders. Users need to get the best value and the highest level of security for their funds. So, we listed a few pros and cons to help users make a balanced assessment of their options.
Decentralized Exchanges (DEX)
One of the biggest promises of blockchain technology is the decentralization of practically everything. Decentralized exchanges follow the same principle as Bitcoin: peer-to-peer, trustless, and open-source.
The users’ computers run these exchanges and therefore, cannot be hacked—at least not unless hackers are willing to spend an enormous amount of money for very little gain. Because there is no central control, it cannot be manipulated or corrupted and has no downtime because it cannot be easily taken down by hackers. With decentralized exchanges, users hold their private keys–the random words required to unlock your account–therefore offering greater security.
Through decentralized exchanges, users also enjoy better conversion rates since no intermediary is taking transaction fees. Plus, decentralized exchanges don’t require personal documents that centralized exchanges require for AML and KYC compliance.
Because decentralized exchanges do not generate profit, they are usually developed and maintained minimally by volunteers. Developers sometimes rely on donations and funding, but could also be working on it without getting anything in return. And because there are no operational funds, there is no client support—if something goes wrong, you’re on your own.
They can also be tricky UI-wise and may require a little online digging for beginners who want to use them. But luckily, there are usually community-driven online forums dedicated to helping people navigate them.
Oasis DEX, ShapeShift, Bitshares, Changelly, EtherDelta, IDEX, and Openledger are among the most popular decentralized exchanges.
Centralized Exchanges (CEX)
The most well-known exchanges worldwide are centralized, run by registered operators who comply with regulatory guidelines. These are websites that do not execute all transactions on the blockchain, which enables them to process transactions faster.
Despite the attractive aspects of DEX’s, centralized exchanges attract more users because there is a lower learning curve; they also have better liquidity and are much easier to use. Because profit-making businesses run centralized exchanges, they are more client-focused. There is usually a dedicated support team for users, and more features are regularly added, updating them to give users a better experience. Additionally, the company has a certain level of accountability if something goes wrong.
Because centralized exchanges, as the term suggests, is run by a central authority, it offers a single point of attack—and therefore, a single point of failure. It is vulnerable to hacks and is not as resistant to corruption and manipulation.
Some of the most popular exchanges in the world include names like Bithumb, Binance, Coinbase, Kraken, Bittrex, CEX, Gemini, and Huobi.
Additionally, because they are run by businesses that make a profit in exchange for their service, some fees can get quite steep depending on market activity. Centralized exchanges don’t always offer the best conversion rates, particularly the biggest ones since they hold a large user base and the pressure to compete isn’t that high.
However, there is a workaround to this: use lesser known, but reliable exchanges. Many new exchanges are emerging. For example, a Hong Kong-based BitAsset, offers good rates and has been building up superior features to compete with established ones.
Decentralized exchanges are beneficial, but centralized exchanges are a necessity.
Many have been pointing out that despite all the rave about decentralization, centralization still has its place in the cryptocurrency space. For those who seem to have forgotten that centralized exchanges played a significant role in bringing cryptocurrencies into the mainstream, and continues to do so, Kraken CEO Jess Powell reiterates that Kraken was the “first exchange ever to trade ether,” and a centralized one at that.
In response to Buterin’s “burn in hell” remark, Powell commented in a Reddit post:
“The dream is getting to a point where decentralized exchanges are so great that centralized exchanges no longer have any advantages. Today, that point is a very long way off, and we’ll need centralized exchanges to get there.”
He points out that ultimately, centralized exchanges are a “bridge” between the current state of cryptocurrencies and the “dream” of full decentralization, and are therefore a necessary part of development.
Until decentralized exchanges are perfected, centralized exchanges have their place. Ending with a commentary on the development of the cryptocurrency space, Powell noted: “You have to build the bridge before you can burn it.”