When looking to buy, sell and trade cryptocurrency, a crypto exchange is generally the first choice for all types of users, experienced and otherwise. There are two major types of cryptocurrency exchanges - centralized exchange and decentralized exchange.
In this article, we will talk about centralized crypto exchanges and decentralised crypto exchanges and how they are different from each other.
What is a crypto exchange?
A cryptocurrency exchange is a platform where you can trade/exchange one cryptocurrency for another or buy and sell digital assets or currencies in exchange for fiat money.
The exchange basically helps you find a buyer when you are looking to sell your crypto and vice-versa. The crypto trading platform usually charges a fee per transaction in exchange for its services. Other than that, security, credibility, support, and the number of cryptocurrencies are some other factors to consider when choosing a crypto exchange.
“Centralized exchanges are exchange platforms that facilitate cryptocurrency trades between traders through a collection of buy and sell orders. These exchange platforms aggregate orders from users and use their software to match and execute the corresponding buy and sell orders,” according to the white paper of Nomoex, a leading centralized crypto exchange with support for 800+ digital assets.
In a centralized exchange, there is a third party or middleman between sellers and buyers who is primarily responsible to ensure the security of transactions and provide support when users need help. Centralized exchanges require users to verify their information (KYC, AML, etc.) in order to ensure high security for their platform users and their data. Centralized exchanges are also secure because they need to be regulated and follow the compliances of their respective jurisdiction where they provide trading services.
Also, centralized exchanges are generally easy to use and do not require users to have any technical knowledge or experience in crypto trading
Centralized exchanges are the most popular and commonly used means for people to invest in crypto tokens. Some crypto exchanges such as Nomoex even allow you to buy cryptocurrencies using fiat money such as dollars, which will make crypto investing and trading accessible to many more people around the world.
Decentralized exchanges, also called DEX, are another type of crypto exchange that provide peer-to-peer crypto trading services without using middlemen or a third party to monitor or match transactions. Instead of middlemen, these exchanges use smart contracts along with an escrow system to execute trades.
Basically, the smart contract of a DEX is programmed to match and execute buy-sell orders on behalf of users. The platform uses an escrow system to temporarily hold user funds for the period it takes to execute a transaction. Users are not required to deposit their money with the platform in order to buy, but they will pay directly to the sellers.
Security: Centralized exchanges are heavily secured but the chances of hacking are there. Security on a DEX is managed by smart contracts that are less prone to hacking, but technical failure is possible.
Convenience: Centralized exchanges are very easy to use and have many crypto pairs and may also support fiat currencies, so they are extremely popular. Decentralized exchanges are difficult to use, may need technical skills and are less popular.
Liquidity: Centralized exchanges offer higher liquidity as compared to DEX.
Transaction speed: Transactions on Centralized exchanges execute faster, while DEX transactions take longer to be processed.
Fees: Trading fees are high on centralized exchanges because of the presence of middlemen. DEX has very low or zero fees.
Control of funds: Centralized exchanges require users to deposit their funds and share personal information with the platform. With DEX, users are always in control of their funds and data.
