What’s the difference between centralized and decentralized exchanges?
Similar to the stock market, a cryptocurrency exchange platform promotes virtual trading of cryptocurrencies. There are two types of cryptocurrency exchanges – centralized and decentralized (DEX). It is important to understand the difference between the two before you dive into the crypto world.
A centralized exchange is a neutral third-party exchange that facilitates any transaction or transfer of cryptocurrencies between two parties. This type of cryptocurrency exchange matches individuals’ searches for cryptocurrency with institutions or traders that offer liquidity. It minimizes market friction by improving liquidity and offering the convenience of trading. The transactions are processed through an account that holds the assets. Liquidity refers to the ability of the market to enable buying and selling of commodities at a stable price.
Different from a centralized exchange, a decentralized exchange has no authority. In this type of exchange, no single account holds the coins or information, instead, the platform serves as a mediator that matches trade order and then channelizes them. No third-party server controls the transactions and the users need not pay an escrow amount to the intermediary.
Here are some of the differences between centralized and decentralized exchanges:
In a centralized exchange, the third-party server is responsible for managing funds deposited whereas in a decentralized exchange, there is no central server, which means that the users are free to connect with individuals that they want to trade with. The participants gain complete control over their assets and they do negotiations on their own.
To trade on a centralized exchange, users are required to fulfill KYC (Know Your Customer) and AML (Anti-Money Laundering) laws, which makes it difficult for an individual to ensure anonymity while trading on a centralized exchange.
On the contrary, trading on a decentralized exchange does not require you to disclose your identity. These types of exchanges are the same as distributed blockchains.
If you choose a centralized exchange to trade cryptocurrency, every transaction needs approval from the exchange authority. The exchange serves as a third-party intermediary that ensures reliable crypto services.
A decentralized exchange, on the other hand, has blockchain protocols such as smart contracts that allow users to transact without any authorization or authentication issues.
The speed of decentralized exchanges is determined by the protocol that the DEX uses. Exchanges such as Uniswap utilise Ethereum as their protocol, which can cause slower speeds compared to centralized exchanges, which often simply move ‘values’ across wallets instantly.
Compared to a centralized exchange, a decentralized exchange is less vulnerable to the risk of hacking. There have been many cases of hacking of centralized exchanges, but since there is no single entry to the decentralized ecosystem, the hackers are left with no authority. To hack the exchange, a hacker needs to take control of more than half of the chain, which is not feasible. However, both types of exchanges are generally very secure.
If you are planning to trade cryptocurrencies, understanding the difference between the centralized and decentralized exchanges will help you to choose the right option before you partner with a cryptocurrency exchange development company for your venture. BitMart is a premier professional digital asset exchange platform. WadzPay Token (WTK) was listed on this exchange in November 2020, after selling out its Initial Exchange Offering in just 11 minutes. WazPay is able to leverage BitMart’s network trading system where more than 2 million users are served.