There are more than 500 crypto exchanges as of today, and based on their method of operation, we can classify them into two main categories: centralized and decentralized exchanges.
Although there are many things one needs to understand in blockchain technology and how it works, it’s equally important to grasp the concept of centralization versus decentralization. So, what is a centralized or a decentralized exchange?
Centralized exchange (CEXs)
Centralized exchanges (CEXs) operate in a similar principle as banks. Here, you deposit your token, and the exchange serves as the custodian. It’s upon the exchange to safeguard the funds and ensure it manages any withdrawal requests.
Keeping your funds in a cryptocurrency wallet means you have your own private keys, and your digital assets are recorded on the blockchain as belonging to you. However, users of a CEX don’t have private keys, and the blockchain records will show the exchange as the owner of the funds, and the exchange keeps records of which tokens belong to each user.
Decentralized Exchanges (DEXs)
Unlike centralized exchanges, DEXs never take custody of users’ funds. These platforms use an order matching protocol and funds are transferred between individual wallets using smart contracts to execute trades automatically.
There are specific decentralized applications that support DEXs. For example, Binance blockchain has its Binance DEXs, which offers users the opportunity to transact with its native token Binance token (BNB) as the base currency.
Pros and cons of both CEXs and DEXs
Pros of using CEXs
Centralized exchanges may be losing their appeal in the recent past due to many people looking to avoid the strict nature of their operations, but they remain the biggest exchanges. From the well-known Binance, Kraken, and Bithumb to the little-known Coingy, Heat Wallet Exchange, Paymium, Bitso, and Bitkonan among others, centralized exchanges have flourished over the years. Centralized exchanges are better than their decentralized counterparts in the following ways:
- Better liquidity: They are backed by central authorities such as banks, hence better liquidity. DEXs lack this privilege as their liquidity is only based on members’ digital assets.
- Ease of changing fiat to crypto: These platforms offer fiat-to-crypto trading, which means you can deposit fiat to the exchange and then use it to purchase cryptocurrencies of your choice. Most DEXs don’t have this capability.
- Ease of recovery- Losing your password for your central exchange account does not spell doom for your digital asset. This is not the case with DEXs where if you lose your password/private key, then you lose all your digital assets in that account.
Pros of using DEXs
Some of the pros of using DEXs are:
- More hacker-proof: the servers of DEXs are normally spread across the globe, hence lower risks of cyber-attacks and less server downtime
- More anonymous: it’s not always needed that one provides personal information to DEXs to be allowed on board, unlike their centralized counterparts.
- Lower fees: one of the greatest advantages of DEXs over centralized exchanges.
Where you can host both
There are crypto exchanges that offer both centralized and decentralized services. The leading exchange with this capability is ExMarkets. You can draw benefits of both centralized and decentralized features even as you get to have decision-making power that both offer.