Understanding Centralized And Decentralized Exchanges

In this article, you'll learn about both exchanges and how they differ so you can make informed decisions.

Centralized Vs Decentralized Exchanges

Although both types of exchanges perform similar operations and functions, they differ in various ways. Let's consider the differences between centralized and decentralized exchanges under the following categories.

Examples of centralized exchanges are Binance, FTX, and Coinbase.

Some examples of decentralized exchanges include UniSwap, SushiSwap, PancakeSwap, and SimpleSwap.

Security 

Centralized exchanges face a relatively high possibility of security breaches. Hence, most centralized exchanges insure their assets against any possible financial loss due to cyber attacks or something of that nature. This means that you don't have to worry about the safety of your crypto if you use a centralized platform.

Lots of centralized exchanges have lost millions to cyber attackers but their customers' assets were not affected as the platform takes responsibility for the safety of the assets under their custody.

Decentralized exchanges also face the risk of cyber attacks but this tends to happen on specific individual smart contracts, not on the whole system.

Also, a decentralized exchange is a permissionless system and they have no strategies in place for vetting the authenticity of crypto.  So, scammers take advantage of this by listing scam cryptos on the platform.

Many investors have lost their money through this type of scam and worse still, there seems to be no recovery system available.

Control

Centralized exchanges take custody of the user's assets. In other words, you depend on them to process your transactions. Also, users don't have access to their private keys in centralized exchanges.

In the case where you fail to comply with their policies or the algorithm detects an inconsistency in your account, they can confiscate your assets and you may have little or nothing to do about that.

Contrarily, in a decentralized exchange, your crypto assets and private keys are not in the hands of a third party. Hence, you have more assurance of the control and safety of your assets.

The system is simply dependent on smart contracts to carry out your transactional operations and this is much more reliable than that of humans.

Privacy

In a centralized exchange, you cannot have access to their services until you reveal your private data to them.

Many people repel this policy because they care much about the privacy of their personal information.

Meanwhile, in a decentralized exchange, you don't share your private data like your security number, name, and even email.

The platform is accessible to anyone from any part of the world, with a computer and access to an internet connection. 

Government Interference

Centralized exchanges are under strict regulations and the government holds them accountable in the case of any misdemeanor from their end.

Decentralized exchanges have no authority to enforce control and regulations on the system. Your reliance is solely on the smart contract of the system.

Customer Support

In a centralized platform, customers can contact the support of the system when they encounter challenges or need clarity on issues within the system. Also, centralized exchanges provide users with the opportunity to recover their passwords when they lose them.

If you encounter difficult challenges such as asset loss in the decentralized system, there's no support system to call as you are solely responsible for keeping and safeguarding your assets. Also, once you lose your private key, then you've lost your assets forever and there's virtually nothing you can do about it. 

Number of Listed Cryptocurrencies

Centralized Exchanges have a limited number of cryptocurrencies for the users to trade. But most of the cryptos listed on this platform are carefully vetted, eliminating the possibility of introducing scam cryptos on their platform.

On the other hand, decentralized exchanges have an enormous list of cryptocurrencies. For example, in Uniswap, there are about 1500 cryptocurrencies available for you to trade, unlike the centralized systems where there are fewer cryptos.

User-friendly Interface

Most of the centralized exchanges are simple to use and friendly for beginners. Users can easily trade their assets without much requirement of guidance for smooth navigation. However, there are certain services in the centralized platform that might require you to seek guidance from an experienced user.

In this regard, some centralized exchanges still don't leave their customers helpless, as they provide tutorial videos that walk you through some complex activities on the platform. 

On the other hand, the interface of a decentralized exchange is mostly cumbersome, and navigating through the platform requires the guidance of an experienced user. Otherwise, you can make an irreversible mistake while trading your asset.

Transaction Fees Associated With Exchanges

Centralized exchanges charge you transaction fees to establish a trade and during withdrawal. For example, Binance charges about 0.1% fees on spot trading and 0.5% on instant buy/sell.

In a decentralized exchange, you don't pay fees for transactions; instead, you pay gas fees to register your transaction on the blockchain. This gas fee depends on the network and the traffic on that network. The gas fee on the Ethereum network can be as high as $60.

Author's Conclusion

Both centralized and decentralized exchanges offer their benefits and bad sides.

Your preference depends on the one that best matches your needs. For example, if the privacy of your personal data matters more to you, then using a decentralized exchange might be an interesting option.