Cryptocurrency exchanges serve their respective markets well and provide an opportunity for traders to buy and sell digital currencies with the lowest possible transaction fees.
However, there are still plenty of people who prefer to trade cryptocurrencies directly with one another instead of going through a centralized platform. While both centralized and decentralized trading options exist, the two approaches have their own pros and cons.
We take a look at the differences between them to help you decide which one is right for you.
What is a decentralized cryptocurrency exchange?
A decentralized exchange is one where trading is handled by a software-based platform and not a centralized exchange owned and operated by a bank or another financial institution.
This allows for flexibility and lower fees, but it also means that each user is assigned a unique “code” that they must use to make trades. Traders who want to avoid being tracked and tracked by other users can go with this kind of exchange.
What is a centralized cryptocurrency exchange?
A centralized exchange is one that is run by a third party. This can be a bank or an exchange. A centralized exchange is less trust-worthy than a decentralized one, as it is reliant on an outside party to maintain security and integrity.
A centralized exchange is more expensive to use, may charge higher fees, and may impose stricter rules than a decentralized exchange.
Pros, Cons of Centralized Exchanges
Execution – Centralized exchanges have been found to be 2-3 times as slow as decentralized exchanges, which may account for some of the reported delays in some coins. Even though some exchanges have been improving their speed, they have been doing so at the expense of user experience, which can be difficult to ignore when choosing your first exchange.
Fees – Centralized exchanges charge lower fees than decentralized exchanges, which can make them more attractive for users who are looking for low-cost trading. However, this also means that users on centralized exchanges have less control over the trades that take place on their behalf, which may impact their confidence in the exchange and make them less likely to use it in the future.
Rules – Most centralized exchanges will impose stricter rules on users than those that are decentralized, including verification requirements, minimum trading amount, and trading hours. This can make it harder for some smaller exchanges to gain wider adoption and make them more attractive to both retail and institutional investors.
Fund Storage – One of the biggest disadvantages of centralized exchanges is that you will need to store your private keys on paper or another type of digital wallet that you will likely lose or forget about. This could be dangerous if you are prone to anxiety or worry and worry about someone else’s access to your funds or hacked accounts. You should always keep your private keys in a safe place and have a plan to protect your funds if something were to happen to you.
Pros, Cons of Decentralized Exchanges
Execution – Decentralized exchanges are still in their infancy and are still growing. As such, there is a lot of room for improvement in this area. Some of the most significant improvements that we can expect to see in the near future include lightning fast trading and much lower fees compared to centralized exchanges.
Fees – Decentralized exchanges are generally less expensive to use than centralized exchanges, which can make them more attractive for users who are looking for low-cost trading. However, this also means that users on decentralized exchanges have less control over the trades that take place on their behalf, which may impact their confidence in the exchange and make them less likely to use it in the future.
No need to store funds – Another important advantage of decentralized exchanges is that you don’t need to store funds on a centralized exchange platform like Coinbase or Kraken. This can be valuable if you are not willing or able to store large amounts of money on a centralized exchange platform like Coinbase.
Accessing and Using Different Cryptocurrency Exchanges
You will find many people using exchanges online. Exchanges are often different from banks and financial institutions. When you open an account with an exchange, you’re not actually opening an account with the exchange.
You’re instead creating an “ Establishment Account ” for your account. This allows you to make quick and easy online trades without having to create a separate account for each exchange. You can also create an account with a centralized exchange like Coinbase and trade anonymously like you would with an online shopping cart.
While centralized exchanges provide a stable trading environment, they are also more expensive to use. Decentralized exchanges are risk-free, as they don’t require you to take any risks by providing no safety features or user authentication. They just allow you to trade like a normal person, without the hassles of being a computer engineer or a financial advisor.