Centralized and decentralized exchanges explained
Cryptocurrencies are digital assets designed to work as a medium of exchange using cryptography and distributed ledger technology without physical form. When managing cryptocurrencies, everyone comes across a transaction. This can happen on different occasions, but most commonly you exchange one good for another. In this instance of buying or selling, picking the right platform is crucial.
In the 10 years since Bitcoin’s public announcement, exchanging has advanced from person-to-person transactions to more complex P2P trading platforms. An online exchange is the most straightforward way to do a transaction of a cryptocurrency, but it is not limited to this medium. You can exchange cryptocurrencies over-the-counter (OTC), at a local exchange, at crypto ATMs, via brokers, and more. Picking the right system for your exchanging is dependent on your skillset, your buying or selling style, and your preference.
An online cryptocurrency trading platform has functions similar to those of a traditional brokerage or stock market; it’s just that it is online. An online exchange is a website that provides you the platform for trading. They can range from beginner-friendly to pro user, can be either fiat-crypto exchange or crypto-to-crypto (C2C) exchange according to the currency used, and can differ from one to another by its basic architecture. Each platform has its own characteristics and advantages and not all are created equal.
When choosing the most suitable online cryptocurrency exchange you have to consider a few basic characteristics. Of great importance is the security level of an exchange, its reputation, the fees they charge (deposit, withdrawal, trading fee), what exchange rate they have (not all exchanges have the same exchange rate), which payment methods can be used, any geographical restrictions, identity verification requirements, and the requirements with KYC/AML procedures.
DYOR – do your own research
DYOR – do your own research. Always. We are here to provide you with information, but this is one of the main rules in crypto, so do not neglect it.
We are a centralized crypto-to-crypto exchange (CCE). We emphasize security, reliability and user experience. Try Tokens.net platform. Our counterpart is a decentralized exchange (DEX) and the main differences are summed up in the following features:
The first and most evident difference is regarding AUTHORITY. A CCE is owned by a formal entity registered at a jurisdiction and DEX is a non-regulated platform provider, serving as a matching and routing layer for trade orders. For easier representation, the equivalent in the physical world would be a supermarket for formal exchange and a flea marketplace that’s non-regulated by jurisdiction.
The second feature of exchange, equally important, is exchanges’ LIQUIDITY, which refers to the ability of digital assets to be converted into cash, coins or tokens easily. Liquidity is an indicator of how many market makers could pull in a significant number of takers. CCE normally has higher liquidity than DEX because it has more users willing to trade, it is faster due to doing transactions in the backend instead of doing transactions directly on the blockchain network, and it has higher trading volume.
TRADE VOLUME refers to the amount of coins being traded on an exchange in the past 24 hours. The volume reflects the market’s activity of an asset, where higher volume indicates higher demand for exchanging. Trade volume influences liquidity; more users > more volume > more liquidity. Centralized exchanges have higher trade volume and you can sell/buy larger amounts of the desired cryptocurrency, while DEX, because of its difficulty to use and limited functionality, has fewer users and consequently lower trade volume and lower liquidity.
TRADING OPTIONS are greater on centralized exchanges. Decentralized exchange offers only one type of trading. The trader sets the price and quantity in the order book and if somebody finds this deal acceptable, the transaction will be executed. Centralized exchanges have more functionalities. At Tokens.net platform, this includes click trade, limit order, and under limit order, take profit.
Of great importance is SAFETY. No exchange is immune to hacks, but in this area DEX is typically less risky because of its distribution of nodes. However, as safety also applies to users handling their assets, a CCE offers a greater safety net for its users, and it is not exceptional that users use CCE also as a wallet. For this reason, it is riskier for a beginner than for a pro user to use a DEX.
EASE OF USE: Less-skilled users are safer when exchanging on a centralized exchange. CCE is easier to use due to its nature of being a business and having a support team answering unresolved questions, while the use of decentralized exchange requires a technically advanced trader. Having to use your private wallet and link it to the exchange poses a greater risk for safety, mentioned above.
EXCHANGES AVAILABILITY: CCE is potentially more prone to downtime due to maintenance, even if we are setting the bar very high.
When choosing the right platform, consider your trading style and technical skills. They will probably be the determining factor for your choice.
The disadvantage of using a centralized exchange is that a user does not have access to private keys. The exchange is owned by a company and so are crypto wallets’ private keys. An exchange nonetheless has a liability towards the user and this is regulated by law. Normally a user would want to access the private key but for active trading this does not prove to be of high importance.
In comparison, a decentralized exchange that demands a higher technical knowledge from the user does not operate on a base of deposits and withdrawals and the user uses their private wallet. There is no company and no company’s wallet. But this trade-off brings other challenges.
Decentralized exchange does not provide customer support when the user has a question or is unsure of exchanging events.
In conclusion, make the decision regarding which type of exchange you are going to use according to your needs and trust.
CCEs currently dominate the cryptocurrency exchange world despite blockchain’s decentralized architecture because of their ease of use, bigger selection of trading types, higher speed and higher liquidity. In contrast, decentralized exchanges are harder to use. While you have control over your assets, they have lower trading volume and lower liquidity, so selling and buying large amount of cryptocurrency is harder. In addition, transactions are dependent on the network and can take time. Worldwide centralized exchanges are much more popular and used more often than decentralized exchanges due to their security, support, and the reassurance of using actual financial services. At Tokens.net we wish to provide excellent exchange tools at the highest level of security.