Since the rise of crypto space in the last few years, there is a massive amount of people getting involved in crypto trading, as the rise of big crypto exchanges where individuals can trade their crypto coins for other coins. There are two types of exchanges where people can trade their crypto coins for other cryptos, stablecoins, or fiat currencies, one is centralized exchanges (CEX) and decentralized exchanges (DEX). Many new traders prefer to trade on centralized exchanges and are unaware of decentralized exchanges and many of them who are aware of DEXs are either confused or not comfortable using them. So in this article, we will go through the pros, cons, and the difference between centralized exchanges and decentralized exchanges, so you guys can have enough idea and choose whatever suits your trading.
Let's dive in...!!
So here we will compare centralized exchanges and decentralized exchanges point by point and see what features do they offer and what they don't.
So beginning with the first step of trading, opening an account in exchange.
For decentralized exchanges, there's no need for any type of Know Your Customer (KYC) or AML (Anti Money Laundering) details. As decentralized exchanges are not governed by any institution or any specific company and do not fall under any government rules and regulations. This makes decentralized exchanges free from anyone specific entity. Because of this freeness, the DEXs are truly decentralized!!
But in the case of centralized exchanges, it is necessary to complete the KYC/AML procedure in order to use all the features of exchange, this is because centralized exchanges fall under the respective government rules and regulations. It becomes necessary for centralized exchanges to gather the user information to comply with these rules & regulations.
Key Point💡
Decentralised Exchanges are censorship-resistant and Centralised Exchanges go through government censorship.
Liquidity plays an important role in the growth and adoption of any type of crypto exchange. Liquidity means how much funds do the exchange has to perform the exchange between two crypto coins. Due to the ease of using and performing exchanges well-settled centralized exchanges have a larger amount of liquidity for high market cap coins such as Bitcoin, Ethereum, BitcoinCash, and many others. The coin listing on centralized exchanges goes through the check by exchange officials and everything is done carefully so only coins of the settled project and high market cap coins get listed on centralized exchanges. Hence the asset coverage on centralized exchanges is larger for large market cap coins.
Whereas due to the openness of coin listing and anyone can list their coins on decentralized exchanges, the lower market cap coins have the higher asset coverage. Due to this, the liquidity for small-cap coins is comparatively larger on decentralized exchanges.
Key Point 💡
Only the large market cap coins make up to CEXs whereas DEXs are open to any type of crypto coins.
Security is also a very important factor while choosing an exchange for crypto trading. In the case of centralized exchanges, the custody of assets is complete goes under the exchange and so is the security of assets. The asset security is managed by the exchange itself but sometimes some crypto exchanges get hacked and all of the assets of a user get hacked.
As earlier, we have seen that the decentralized exchanges do not have any entity to govern them and are open-sourced. So the custody of your coins is completely yours and is accessible to you anytime from your wallet. The security of your coins is your responsibility. The decentralized exchanges don't get hacked but at the individual level, you have to be a caret with your backup seed phrases, passwords, and private keys. And you have to be careful with phishing attacks which are generally used by hackers
Key Points 💡
- You don't have custody of your funds in case of centralized exchanges
- You need to be careful with your wallet seed phrases and try to note them on paper.
- Do not save seed phrases in digital formats like screenshots or documents, as they're easy for hackers to hack.
The decentralized exchanges are not user-friendly (UI/UX) and mostly the trades cost more on them so not very popular in small traders. But the pros are they are censorship-resistant and do not come under anyone's control, not even governments, so it provides anonymity to your trades and funds. But the centralized exchanges offer an easy user experience and provide a comfortable user interface but it comes with the cost of non-anonymity and censorship.
So both the types of crypto exchanges i.e. centralized and decentralized exchanges have their own pros and cons, choose the best suitable for your purposes.
It is a republished from the original article of our team member.
Hope you find this article informative and thanks for your time!!
