Difference between centralised and decentralised exchange

Choosing between centralised and decentralised exchanges has become tougher for traders. Most specifically because of how both continue improving their services. However, there are clear differences between them that can affect one’s activities as a trader, investor, and even as a gambler in the crypto economy. 

Exchanges are the platforms where you can buy and sell cryptocurrencies for other assets. Whether it’s centralised or decentralised can be ignored if all you need is the fact that your assets are going to be reliably liquidated. It’s especially helpful to get your profit from Gamdom sports betting. If you care about the nuances of trading, then it’s worth knowing how a centralised exchange differs from a decentralised one. 

Here’s a lite guide to centralised and decentralised exchanges for beginners:

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Main definition of centralisation 

The concept of centralisation refers to who has control over the platform. It is the core factor for traders’ decision in choosing between a centralised vs decentralised exchange. Centralised means that an exchange is under ownership of a company, person, or corporation. This is called the ‘single entity’ that controls the centralised exchange (CEX) including its features and which kind of assets are supported by it. 

The single entity acts as the intermediary between buyers and sellers as well as the admin for the trading platform. A decentralised exchange (DEX) on the other hand is a trading platform without an owner or an intermediary. People trade directly with each other but the price and the validity of the transaction are verified by the exchange’s algorithm. 

Centralisation isn’t exclusive to the trading platform because it is also observed in cryptocurrencies but under a different scope. What is a centralised crypto? It’s when a small percentage of users either hold the majority of the assets in circulation or own nearly half of the nodes that make up the network. 

This is typically private blockchains used to distribute sensitive information only within the company and its partners. What is a decentralised crypto? It is a blockchain run completely by an algorithm and its nodes are maintained by miners. 

Points to consider when comparing CEX vs DEX for traders

Choosing between centralised exchange vs decentralised exchange is all about deciding which feature you believe is needed in trading. Here are several points you should consider as a trader and what they mean between both kinds of platform:

Fiat support

Right off the bat, it’s commonly known that crypto cannot be traded for fiat at a DEX because they cannot be partnered with a payment method provider. CEX, on the other hand, can facilitate direct exchanges between fiat and cryptocurrencies. There is a work around for DEX where you convert altcoins to stablecoins which is easier to trade at a CEX. 

Need for trust

DEX has the advantage for this because it is non-custodial. All money used in transactions in this platform goes directly to parties involved only. CEX, on the other hand, will need money to go through the central authority’s banks before they eventually reach who you are trading with. Therefore, you need to trust the owner of the exchange to complete your transaction even though they have the power to keep your money. 

User experience

CEX is more user-friendly, making it the easier choice vs DEX for newcomers or casual traders. The latter typically gives you all the tools you need in trading but without the support for finding the best deals. Hence, you need to know the basics of market indicators to use DEX properly for profit.

Point of failure

The biggest difference between centralised and decentralised crypto exchange is the point of failure. If the company administrating CEX goes down then the whole trading platform is gone. DEX uses blockchain technology to facilitate trades which eliminates the possibility of a single point of failure. Any of the nodes in the network can be offline but the platform will still run and complete transactions albeit at a slower rate because of having fewer processing power.

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Transparency 

DEX is popular among veteran traders precisely because it is transparent with the process of a transaction and the state of the market. Information about CEX can be manipulated in the interest of the company that owns it. Traders are wary of transparency because everyone needs a heads-up to pull out their assets if the exchange is about to go down. 

Potential for hacks and bugs

A CEX has the power to strengthen its security regularly and the ability to freeze assets if it’s compromised. Alternatively, companies can also refund losses or pay for damages in case of a hack or a faulty system. A fully decentralised crypto exchange doesn’t have such liberties. It is less prone to hacks and bugs but it is possible. That’s why many DeFi, like Bancor, still have a central authority that doesn’t have full control over the network but has the capacity to freeze assets.

CEX or DEX: Which is better?

Many crypto users use both services but if you have to choose one between CEX vs DEX, then you have to be more picky. If you want a quick and easy experience selling your crypto, then a centralised exchange is the best option. They come with copy trading services to help you find the best deals. Only try a decentralised exchange if you plan to study more about trading to become an expert. Hence, the choice between centralised vs decentralised cryptocurrency exchange is more personal than objective. 

FAQ

There are deeper layers to the difference between decentralised and centralised crypto exchange. The details above cover a majority of the topic’s complexity but there’s always more questions you can ask. Below are some of the most frequently asked questions:

What does ‘centralised’ mean in crypto

Centralised specifically means having one owner. In an exchange, this is the third-party validating the transaction between buyer and seller. For blockchain in general, it is someone who controls a majority or all of the nodes in the network. 

Which is better for newcomers, centralised or decentralised exchanges?

Centralised crypto exchanges are better for new traders/investors because these usually have customer support services and quality of life aids. Decentralised trading platforms are for experienced traders only but both have similar tools available to you should you need them.

What are examples of a centralised exchange?

The top exchanges are typically centralised like Binance, Coinbase, and Kraken. They each have a company of the same name maintaining their operations.

What are examples of a decentralised exchange?

The top decentralised exchanges include Bancor, SushiSwap, and PancakeSwap. They are typically built on blockchains like Ethereum and Binance Smart Chain.

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Words: Clarence Clarke