What is difference between Centralized and Decentralized Cryptocurrency Exchange?

What is a Centralized Cryptocurrency Exchange?

A Centralized cryptocurrency exchange is a virtual currency exchange platform authorized by a central entity that acts as a mediator between cryptocurrency buyers and sellers. There are different types of cryptocurrency exchanges such as centralized, decentralized, and p2p.

Centralized cryptocurrency exchange is a dedicated platform for exchanging cryptocurrency among crypto investors.   A centralized crypto exchange stores digital assets on behalf of crypto investors and facilitates crypto trading strategies while determining the trading terms and conditions.

Key Features of a Centralized Crypto Exchange

Centralized Cryptocurrency exchanges have some special characteristics and hold private keys to their clients' wallets, which is important for cryptocurrency transfers.

Centralized exchanges have a KYC (Know Your Customer) process, and must comply with regulatory requirements and users have to verify their identities to take part in trading activities.

Centralized cryptocurrency exchanges operate with trade engines and order book matching technology to enable cryptocurrency trading. The order book technique helps to identify matches between buyer and seller orders to streamline trades. 

Centralized exchanges utilize the services of market makers to provide liquidity for listed cryptocurrencies. Examples like Binance, Coinbase, Kraken, etc

Advantages of Centralized Crypto Exchanges

The centralized crypto exchange has a user-friendly interface that enables various types of crypto investors from beginners to pro traders. 

Centralized crypto exchanges have access to multiple cryptocurrencies for the traders to invest in diversely.

Centralized exchanges have higher liquidity than DEXs, traders can trade cryptos without influencing the market value.

The primary reason centralized exchanges have higher liquidity is their access to a more extensive pool of buyers and sellers. 

Some CEXs allow the trading of derivatives, such as collateralized debt, options, and futures. 

What is a Decentralized Cryptocurrency Exchange?

A decentralized cryptocurrency exchange is an exclusive decentralized trading platform, where user have complete control over their assets and a noncustodial blockchain system that operates peer-to-peer trading.  A decentralized exchange does not directly handle investor/user assets, instead it bridges the traders to choose their trading partners with precise requirements. User assets are stored on their web3 wallets, and users can instantly trade cryptos through their wallets. It does not require any KYC and they are controlled by a central control authority. 

Decentralized exchange examples include PancakeSwap, Uniswap, dYdX, and Bisq.

Key Features of a Decentralized Crypto Exchange

A decentralized crypto exchange works based on smart contracts. Smart contracts are precisely written contracts among the parties involved in the transaction.  These contracts are immutable, transparent, and decentralized. 

Trading executes based on liquidity pools, a place where cryptocurrencies are reserved with the help of smart contracts.  It helps to perform lending, trading, and swapping, and also provides incentives for users who stake their cryptos in the pool. Users can perform trading anonymously.

DEX allows the traders to handle independence over their private keys, and therefore, they are exclusively accountable for the security of their crypto funds.

Advantages of decentralized crypto exchanges

DEX exchanges are completely decentralized without central control authority, they don't require KYC for users on their platforms, and users can perform trading anonymously.

Even unbanked users can take part in cryptocurrency trading from anywhere instantly with the help of DEX. 

DeFi platforms, specifically built to facilitate blockchain-based financial services, enable traders to lend and borrow funds in a peer-to-peer manner.

Users with the help of lending pools enable users to lend out their assets and earn interest as rewards.  DeFi users earn passive income through DeFi staking as rewards. 

DEX crypto exchanges have lower transaction fees than centralized crypto exchanges.

DEX exchange allows direct transactions between buyers and sellers, trades are executed without intermediaries. 

Conclusion 

Centralized Cryptocurrency Exchange and Decentralized Cryptocurrency Exchange have their pros and cons. Crypto investors must understand the pros and cons of the cryptocurrency exchange before investing.