Centralized Vs. Decentralized Cryptocurrency Exchanges – What You Should Know
With the growing interest in popular cryptocurrencies like Bitcoin and Ethereum, people are already exploring the crypto space. The easiest way to achieve this is through large exchanges like Binance or Coinbase. But the further exploration of the crypto space has put exchanges like Uniswap in the spotlight.
Following a bit of research, studies show the appropriateness of Uniswap with the primary ideals of cryptocurrency, with a divergent school of thought on Coinbase and Binance. So the itching question here is what differentiates centralized exchanges like Coinbase from decentralized exchanges like Uniswap.
Table of Contents
What Is A Centralized Exchange In Cryptocurrency?
A Centralized Exchange (CEX) can be defined as an exchange that avails the function of a middleman to conduct and supervise asset trades and their handling. Transfers are not exclusively between two parties when a coin is exchanged for another on a centralized exchange. The trade is managed by the exchange.
What Is A Decentralized Exchange In Cryptocurrency?
A Decentralized Exchange (DEX) can be described as a type of exchange that is devoid of a third party. Assets are personally held in a DEX without the meddlesome of a third party like a bank.
Centralized Vs. Decentralized Cryptocurrency Exchanges: What Are The Differences?
As we have had a better understanding of what centralized and decentralized exchanges are, let’s have a look into their critical differences, advantages, and disadvantages.
1. Security & Privacy
There is less likelihood of being exposed to scams in a centralized exchange. It is often habitual of the crypto space that people buy unknown coins and the whole investment would be lost to the cryptocurrency project that ends up being fake, with scammers disappearing into thin air with millions worth of crypto assets.
Also, your wallet is in care of the centralized exchange, such that your password could be retrieved in the event of forgetting your password for access.
For the decentralized exchange, scam is prevalent without certification. Also, you can’t retrieve or reset your password if you forget your password.
2. Technological Maturity
The functionality of centralized exchange is similar to large digital services of Facebook, Twitter, etc. An advanced technology that is characterized by a high level of stability is provided for the end-user.
Scalability is the critical pitfall of the decentralized exchange. There is a rapid technological evolution that goes with a blockchain network, therefore, the restraint decentralized exchanges are facing is bound to be lessened in the future.
3. Cryptocurrency Asset Diversity
As of the end of 2021, there are about 6,000 cryptocurrencies in the crypto market. To be listed on a centralized exchange, an asset has to satisfy security protocols, have legal standards compliance, and trading activity.
On a decentralized exchange, anything can be listed. This translates to more risk as it gives a platform for new and highly-demanded assets to be traded.
As the centralized exchange is deemed safer with a user-friendly framework, a decentralized exchange is technologically advanced, and as such might become the future standard. Always keep it in mind to not invest in something you can’t afford to lose.