As cryptocurrency is getting popular day-by-day, people show a fair amount of interest in them. However, the discussion always rounds about Centralized and Decentralized cryptocurrency exchanges.
So, hold on to that thought; we have decided to address the elephant in the room. Therefore, if you have any queries left about the difference between centralized and decentralized cryptocurrencies? Or which is better? And which crypto exchange should you choose? This is the article that you need.
With that said, we shall begin with an overview of the topics that are supposed to discuss in this article.
- What is a cryptocurrency?
- What is a cryptocurrency exchange?
- Types of cryptocurrency exchange.
- What does centralization mean, and how centralized exchange works?
- What does decentralization mean, and how decentralized exchange (DEx) works?
- Centralized and Decentralized cryptocurrency exchanges: The significant differences.
- Future of Centralized and Decentralized exchanges.
What is a cryptocurrency?
Before we go further, you should know the general idea of cryptocurrency. Supposedly, cryptocurrency is a kind of payment medium that you exchange in terms of services and goods. Similar to the concept of real money, right? But how is it different?
The only thing that differentiates it from real money is that it requires an online ledger that secures the online payments. Now, most companies are working with their cryptocurrencies. You can consider them as chips from casinos.
Subsequently, you have to convert them in exchange for real money to access the products or services you need. Furthermore, the ledger technology on which these cryptocurrencies work is called a blockchain. This ledger protects the value of the real assets that are safe at your end.
What is a cryptocurrency exchange?
To understand the differences between centralized and decentralized cryptocurrency exchanges, you must know what a cryptocurrency exchange is? In simple terms, these are the places where you can buy or sell cryptocurrencies.
With that said, there are some unique regulatory rules for every exchange that you should consider. But generally, all of these provide you access to almost every cryptocurrency.
Types of cryptocurrency exchange.
Besides the earlier context, there are 2 types of cryptocurrency exchanges in the market.
Here are the two types of cryptocurrency exchanges.
- Centralized cryptocurrency exchange
- Decentralized cryptocurrency exchange (DEx)
We shall discuss each of the types in detail in the next sections of this article.
What does centralization mean, and how centralized exchange works?
In order to understand the word centralization, we would like you to have real-life examples that you use every day. There are some systems that you use daily. It doesn’t matter if it’s your social media, your bank, your cab service account, or merely a streaming service, more practically anything you can access on the internet.
Obviously, all of these are controlled by a centralized authority, but what does that mean? Clearly, it means that to transfer your data from one source to another, you have to use a third party as an intermediary on your behalf.
For further explanation, we have to quote the example of Yahoo, which also uses centralized servers. After you hit the button by giving them details; and send it further, your data is part of their centralized servers now.
Suppose you add your friend on Yahoo and send some of your work documents in an email. Before you do that, you have to access your Yahoo account with your data such as name, image, nationality, and date of birth.
It should be noted that when you access Yahoo, you trust them that they aren’t going to expose your data for their benefits. Instead, they will keep your data private and keep it exclusive. However, that isn’t always the case. As a matter of fact, Yahoo was once hacked in 2014 by a group of people who were able to steal millions of accounts and their data.
In particular, how do you think these people could gain access to all the data by hacking only one medium? The answer is pretty simple since Yahoo uses centralized servers, and if hackers were able to get into the center, they could get into the whole picture.
What does decentralization mean, and how decentralized exchange (DEx) works?
As the name indicates itself, it is entirely against the idea of centralization. Firstly, you will be surprised to know that decentralization was possible because of blockchain technology. The first-ever was the Bitcoin blockchain established in 2009 by Satoshi Nakamoto, whose real identity is still unknown.
Further, if you want to send some amounts in a decentralized exchange, the central authority has nothing to do with them. Instead, anyone who wants to be part of the system can connect their device and verify the payments.
Additionally, each device connected in the system is referred to as a “node,” There are hundreds to thousands of nodes operating in a network.
Certainly, this means that if someone attempts to hack the system, he will only be able to hack a single node — while the rest of the nodes keep the blockchain intact without losing any data.
However, the vital thing to remember here is that decentralization is not limited to transactions only. You will be amazed to know that how many vast applications are present nowadays.
Secondly, there is no need for people to show their identities over the internet. You have the edge of logging in and interact in a decentralized system with the aid of private and public keys.
The third thing to keep in mind is that blockchain is neither in the control of any single authority nor by any government in a decentralized system. Instead, the power is fairly divided among the people who want to be part of this system.
With these points in mind, you can understand how it affects society in a better way. It takes control from significant companies and associations and divides them among the ordinary people.
Centralized and Decentralized cryptocurrency exchanges: The significant differences.
In this next section, we will discuss some major factors through which centralized and decentralized cryptocurrency exchanges are differentiated. Moreover, these factors are some pros and cons of one exchange over the other. Sounds interesting, right?
As you have learned earlier, authority is one of the primary differences between centralized and decentralized cryptocurrency exchanges. However, in the case of a centralized crypto exchange, most of the power belongs to a third party through which you have to proceed further.
On the other hand, we have a decentralized crypto exchange that provides the most control to the user. You are not bound by any third party to proceed on your behalf, which means that your data remains secure at your end.
Since decentralized exchanges provide more authority to their users, they are becoming more and more popular. However, it is also causing the complexity of a platform.
Government support is one of the factors that you should have in consideration. In the case of a centralized exchange, the government has the higher authority over each individual using that system, so the government supports it.
Secondly, governments can identify the individuals only in a centralized exchange. In contrast, a decentralized business keeps your identity hideous, which is the main reason the governments don’t support such decentralized exchange.
As we have discussed the decentralized cryptocurrency exchange and how it works, you will be pretty sure that it is impossible to hack the whole system. Indeed, this means that a decentralized exchange provides far better protection than a centralized exchange.
If we look in the past, there are many incidents of hacking transactions in a centralized exchange. Although they have developed their systems to offer more security, they can never relate to the safety of the decentralized exchange.
In trading cryptocurrency, there is a significant risk of hackers, but with decentralized systems, that threat comes to an end for good. As a matter of fact, some centralized exchanges offer decentralized accounts to their customers; to keep the users free from any risk of losing transactions.
Regulation is one of the essential factors that you should know before choosing the boss here. In the case of centralized crypto exchanges, they are pretty easy to operate. However, they require licenses to process transactions and follow the rules of the regulatory authorities operational in that specific zone.
On the other hand, if we look forward to decentralized exchanges, they don’t need any licenses to operate, but they have different challenges to overcome as well. Thanks to the blockchain technology that is dispersed in the local regions.
Therefore, even if regulatory authorities prohibit decentralized exchange in a particular region, it can still be operational.
Time is a valuable asset, and it isn’t the same for both exchanges. Do you want to know how? Of course, you do. Well, decentralized platforms are more likely to consume more time than centralized systems.
Along with that, you can have an idea that how much time it requires for transactions through blockchain technology (which is decentralized) by a report. According to the report, a decentralized crypto exchange required about 15 seconds to complete a transaction, which is considerably more time than 10 seconds of a centralized cryptocurrency exchange.
In the present time, we have to say that centralized crypto exchanges are much more famous than decentralized cryptocurrency exchanges. Additionally, these exchanges provide good benefits of having a definitive infrastructure and reliable liquidity, but they came much earlier than decentralized crypto exchange.
However, decentralized cryptocurrencies offer some distinctive benefits to their customers, so they are becoming quite famous. Moreover, several companies are launching their decentralized cryptocurrency exchanges (DExes) in the market, for instance, Binance’s DEx.
Centralized crypto exchanges are expensive than decentralized ones. The main reason is that centralized exchanges have to charge their customers directly. However, the charges that consumers have to pay are mainly on the services they obtain from the exchange.
On the other hand, if you look towards decentralized crypto exchange, they charge 0 to very fewer prices on transactions through their blockchain, which is a plus for most consumers.
If you want to know which exchange offers more features, the answer would probably be centralized cryptocurrency exchanges. If you are a centralized exchange user, you will see that you can access multiple tools, such as margin trading, portfolio management, and other tools for a better trade.
On the other side of the coin, we have decentralized cryptocurrency exchanges that don’t offer such tools to their users. For instance, you get a limit on orders and no offer margin trading. However, we hope that when more platforms join the market, they might provide better facilities.
Liquidity is the ability to transform your valuable assets into readily available cash. As a matter of fact, a centralized cryptocurrency exchange offers you good liquidity over a decentralized exchange.
Do you wonder, why is that? The primary reason is that most people in that market are more likely to invest in similar trends. So an asset has a higher demand than other ones, several sellers would sell it accordingly. Furthermore, there are market makers who add liquidity in a centralized exchange.
On the other half, it will be surprising that decentralized exchanges don’t offer liquidity as much as centralized systems provide. The primary reason behind this is that order matching requires more time in DEx than centralized systems. Other possibilities can be due to low popularity.
Future of Centralized and Decentralized exchanges.
So you have gone through the whole article, you are much familiar with how centralized and decentralized cryptocurrency exchanges work. There are some particular benefits of decentralization, but the question to answer is that in the future, who is going to rule?
Decentralization ultimately means to take power from authorities or corporations and divide it among the consumers, which will make lives much more manageable, quicker, fairer, cheaper, transparent, and best of all? Anonymous from the world.
But here is the catch, the companies and authorities that have the power and money in the centralization system aren’t going to support decentralization at all. Rather they’ll fight back and try their best to prevent decentralization at any cost. Definitely, they don’t want to lose authority or money.
However, in our vision, as the world is progressing, decentralization will become more popular after ten years, with the majority of the companies running on decentralized systems. This will not only make the system stronger but beneficial for the consumers.
Moreover, this is our perspective. The truth can unfold with time alone. If you think decentralization isn’t beneficial or the future beholds something else, don’t forget to comment down and let us know.
And here, this gives us an end to centralized vs. decentralized cryptocurrency exchange. After reading the whole article, we are sure that you know how this exchange works practically and which is beneficial for you.
To be honest, centralized and decentralized systems have their pros and cons. It depends all on your requirements. Although decentralization is still in its early stages, it still has to grow further, and it provides plenty of features that can solve people’s modern financial problems.