Digital assets exchanges have recently come under the public scrutiny and became a hot topic across the communication channels and top blockchain and finance media outlets.
The blockchain community is split between the two types of digital exchanges - those centralized and those decentralized.
What is a digital assets exchange?
Simply put, a digital assets exchange is a market exchange, similar to the traditional ones, that handles cryptocurrencies (digital assets).
The more common, centralized crypto exchange like Huobi Pro, the world’s largest digital exchange, enables users to:
• Buy/Sell an X amount of cryptocurrencies for fiat money (and vice versa)
• Swap one crypto for another
• Engage in margin trading
All on the central platform that handles the transactions via a simple user interface.
Underlying advantages of centralized exchanges
Screenshot of Huobi Pro
While many argue that centralized exchanges are opposite from the original Nakamoto’s idea of peer-to-peer money transfers, they do offer a host of advantages as opposed to decentralized ones.
First -- and most important -- they are heavily regulated. As such, centralized exchanges offer a far better liquidity since they are more trusted.
Second, the transactions speed of decentralized exchanges in nowhere near the order executions time at centralized ones. On the market that is notorious for its extreme volatility, every second count!
Moreover, we can argue that it was centralized exchanges like Huobi, Coinbase and alike that ensured quick global adoption of digital currencies by enabling a traditional way of trading thus, making cryptocurrencies monetary valuable. Without them, this process would not reach the current level for years.
What is a decentralized exchange and is it really hack-proof as many claims?
Decentralized exchange removes the need for the third party (read: central authority) in the transaction process. In other words, it’s the true peer-to-peer exchange where the platform merely serves as the rally point between a buyer and seller.
However, on decentralized exchanges, a user can only trade cryptocurrencies.
Furthermore, given the nature of decentralized exchanges, margin trading, one of the most popular ways to make money on assets, doesn’t exist.
And, since decentralized exchanges are not regulated to the extent of the centralized, they are less trustworthy and thus, less liquid meaning that there’s a limited number of assets you can buy/sell.
ARE DIGITAL EXCHANGES REALLY RESILIENT TO HACKS?
A true decentralized exchange should be immune to hack by default, at least in a greater extent than centralized. However, the most recent attack on Bancor, one of the best-known decentralized exchanges, where hackers stole $23.5M in digital currencies, raised some serious questions about this assumption.
Clearly, nothing is fully hack-proof. Although, just because someone claims that the exchange is “decentralized,” it doesn’t necessarily have to be that way and Bancor is a good example. Because, even if several nodes run the exchange, the same company may own all of them which, by definition, isn’t “decentralized.”
WHAT ARE THE ADVANTAGES OF DECENTRALIZED EXCHANGES?
• They are, by default, more secure since there is no central server that stores the keys.
• The transaction occurs directly between two parties (buyer and seller) without KYC identification, which means increased anonymity.
• It’s a peer-to-peer platform run by users, which is in a total correlation with the underlying idea of the blockchain and cryptocurrencies respectively.
Conclusion
During an interview with Jon Evans at TechCrunch Sessions: Blochain, Ethereum founder, Vitalik Buterin clearly sided with decentralized exchanges in a spirit of the underlying guiding principle of the blockchain and that is that nothing should be under the control of a central authority.
However, while being a visionary and believing in the cause is praiseworthy, that doesn’t change the fact that decentralized exchanges have their limits and that, without centralized ones, cryptocurrencies would hardly gain the real monetary value.
Furthermore, the transaction process on decentralized exchanges is just too complicated for an everyday user whereas centralized exchanges provide that familiar, simple-to-use interface thus, a user-friendly process.
Bottom line is that decentralized exchanges are still far away to become pillars of the crypto trades - if they ever reach that level.
