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Centralized vs. decentralized – Exchanges demystified

exchange software

Cryptocurrencies are all the rage today. These currencies are perceived as generally secure, and in addition, it is impossible to counterfeit them. The general consensus among investors and industry analysts is that crypto will continue to evolve, eventually becoming the de-facto standard for trade the world over. Its security features and accessibility are two of the main reasons why crypto is predicted to eclipse traditional forms of currency.

This ongoing explosion in the prevalence of crypto necessitates a corresponding increase in cryptocurrency exchanges to facilitate their buying, selling, and trade. In order to establish well-established trading, a cryptocurrency exchange usually supports upwards of 20 different currencies. There are two major types of cryptocurrency exchange software that this article will be exploring. They are centralized and decentralized exchanges, respectively.

A centralized cryptocurrency exchange functions as a modern-day bank. They are ‘owned’, and are generally safe and well-regulated. These exchanges, however, are not without their drawbacks. Currency stored in a centralized exchange can be susceptible to compromise, as currency stored by a third-party is ultimately not yours. These centralized exchanges are also prone to be hacked as they function around a concentrated point of failure, control, and/or regulation. It is a lot easier to gain control over something once you know where a major part of it is concentrated. What’s worse is the fact that the entire exchange can disappear overnight.

You might also like to read how to Keep Your Cryptocurrency Safe – Top 5 Most Secure Bitcoin Wallets

Decentralized exchanges, however, firmly establish you as the owner of your currency. There are usually no elaborate registration or KYC requirements for decentralized exchanges. Withdrawals and deposits are not necessary. P2P transactions are managed by programmatically secure smart contacts. One of the primary advantages that decentralized exchanges have over centralized exchanges is that they do not function around a concentrated point of control and/regulation. This drastically reduces their vulnerability to compromise, in comparison to centralized exchanges.

Decentralized exchanges facilitate trade in such a way that currencies are exchanged from and in between user wallets, over wallets operated by the cryptocurrency exchange. It is not unusual for these exchanges to offer escrow services in order to ensure that fraudulent activities do not take place. 

Let us take a look at how decentralized exchanges function:

  • To exchange their assets with some other assets that are available on DEX, the owner of the token places an order.
  • Following confirmation of a selling order, other users can enter bids by indicating a buy order.
  • Upon expiration of the time set by the seller, the bids are reviewed and executed by the owner and buyer

This is how it goes down from a user perspective:

  • Using your wallet address – logon to blockchain decentralized exchange
  • You enter a sell or buy request
  • The transfer of assets is completed upon execution of smart contracts
  • You disconnect

The fact remains that decentralized cryptocurrency exchanges have not picked up in popularity, quite yet. Coinbase, Bittrex, and Binance are examples of popular centralized exchanges; centralized exchanges are dominant in today’s scene, being responsible for 99% of total cryptocurrency transaction volumes.

We just took a brief look at decentralized vs centralized exchanges, and some of the benefits and drawbacks associated with them – in addition to gaining basic insight on how they function. The following criteria also need to be considered when evaluating decentralized exchanges.

  • Fees

When using conventional platforms, customers have to pay a per-trade fee. In centralized exchanges, a set percentage of the fee is charged for every transaction. The setup in a decentralized exchange can be compared to the per-trade fee concept. 

  • Anonymity

As specified earlier, elaborate registration processes and KYC requirements are not a part of decentralized exchanges. This anonymity, in addition to simplifying, permits access to utilities that are usually unavailable.

  • Ownership

Unlike centralized exchanges, decentralized exchanges provide owners with complete control/authority over their assets. 

  • Liquidity

Price discovery becomes difficult to achieve without liquidity. This is one of the prime arguments against decentralized exchanges.

As crypto grows into its own, cryptocurrencies have to assume center stage in the ever-expanding crypto ecosystem. The choice between centralized and decentralized exchanges completely boils down to personal preference. With decentralized exchanges, a greater degree of accountability is required to protect your assets. 

Decentralization is poised to introduce a new world, a world without boundaries.

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