The cryptocurrency industry has existed for over a decade, and the concept of decentralisation — one of cryptocurrency’s most significant tenets — is gaining currency. Since the idea of cryptocurrency was introduced, exchange platforms have also been springing up.
In this article, we look at the differences between centralisation and decentralisation concept application in cryptocurrency exchanges.
The term “crypto exchange” refers to a location where you may purchase or trade cryptocurrency. Each cryptocurrency exchange has its own set of laws and restrictions, but they all provide you with access to the most widely used cryptocurrencies in the market. These exchange platforms mainly have two types: decentralised and centralised.
What is a Centralised Cryptocurrency Exchange?
Centralised exchanges, also abbreviated as CEX, provide a link between fiat and crypto, accepting debit and credit cards and bank transfers, allowing for a seamless two-way transaction. Trusting someone else with your money is a vital aspect of a CEX, and it’s possibly the driving reason behind it.
At this stage, a CEX is more likely to provide cryptocurrency or cryptocurrency pairings. Customers would be able to swap bitcoin for ether tokens, for example. Fewer exchanges provide fiat currency or cryptocurrency pairings, allowing bitcoin to be exchanged for USD. Some examples of these exchanges are Coinbase, Robinhood, Kraken and Gemini.
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You are now aware that, in a CEX, coins are stored by a third-party service and are not yours. This might raise security concerns, listing the associated risks, including the possibility of hacking and theft. However, these are what decentralised crypto exchanges seek to prevent and resolve.
What is a Decentralised Cryptocurrency Exchange?
A decentralised cryptocurrency exchange, or DEX, is comparable to a centralised cryptocurrency exchange. However, it does not rely on a third party or middle man, creating what is commonly referred to as a “trustless” environment. Instead, the funds in this transaction are all kept on the blockchain.
Users of DEX preserve their digital coin wallets’ private keys. So rather than putting your confidence in the firm that runs your preferred cryptocurrency exchange to keep your assets safe, you can verify that your digital currencies are secure. You can keep your funds safe when trading altcoins by following all of the required best practices for private key maintenance. Some examples of these exchanges are MDEX(BSC), BurgerSwap, Uniswap (V3), and PancakeSwap (V2).
According to the data from Dune Analytics, trading activity on many DEX surpassed $50 billion in January, breaking the previous high of $26 billion recorded in September 2020 by a large margin.
Centralised Crypto Exchange (CEX) vs. Decentralised Crypto Exchange (DEX)
Let’s look at the five key differences between the two kinds:
As mentioned above, the exchange retains the entire possession of the currency in CEX. Holding off on the key exchange, on the other hand, might result in a speedier execution because the user is not required to give access. However, this might be the cause of the crypto heist.
While in DEX, users retain complete control over their accounts. One crucial reason why decentralised exchanges are gaining popularity is because of this.
In its most basic form, liquidity relates to how easy it is to convert cryptocurrencies into cash fast — and if this can be done without lowering the asset’s value.
Because different users place specific orders based on market patterns, centralised crypto exchanges have higher liquidity. As a result, if an asset is in high demand, it will be purchased or sold by various users. It also features market makers that provide additional liquidity to the marketplace.
On the other hand, decentralised crypto exchanges do not have much liquidity because order matching takes time.
Users of CEX are charged for their services. These prices differ from one supplier to the next, depending on the features they offer. In comparison, DEX charges either nothing or very little for matching orders on the blockchain.
Centralised crypto exchanges are simpler to govern than decentralised crypto exchanges. Centralised platforms require licenses and must follow the regulations of their region’s local regulatory authority.
However, decentralised crypto exchanges are not regulated since it is extremely difficult to do so due to its distributed blockchain.
There are increased risks of information being restricted under centralised crypto exchanges. However, because there is no central authority controlling the data, the decentralised crypto exchanges are less vulnerable to censorship.