If you look forward to purchasing or trading Bitcoin, you can use a cryptocurrency exchange. A cryptocurrency exchange is a digital marketplace that allows users to trade cryptocurrencies using fiat money or altcoins, acting as an intermediary between buyers and sellers. Many of the leading cryptocurrency exchanges are easy to use and accessible from multiple locations. Cryptocurrency exchanges may support the trading of other digital assets, including non-fungible tokens. Cryptocurrency exchanges and stock exchanges share some similarities, the only difference being that cryptocurrency exchanges are largely unregulated. As cryptocurrency usage increases, so do regulations around the world, meaning that the landscape is constantly evolving.
Cryptocurrency exchanges may be centralized or decentralized. It’s important to get a good understanding of the similarities and differences before participating in the cryptocurrency ecosystem. The two distinct types of cryptocurrency exchanges have advantages and disadvantages.
What Is a Centralized Cryptocurrency Exchange?
A centralized cryptocurrency exchange is controlled by a single entity or group. E.g., Binance or Crypto.com. It’s the principal avenue for acquiring cryptocurrencies, especially for first-time investors. An organization oversees all the transactions and formulates the exchange’s rules and fees. It typically offers browser-based platforms and mobile apps. Centralized exchanges operate as trustworthy brokers in deals and often serve as custodians, providing safekeeping for investors’ assets. As a rule, centralized exchanges vet and limit their offerings. For example, they might offer support for tokens native to the chain they run. Most importantly, centralized exchanges only support government-backed cryptocurrencies, so they integrate only a few digital assets.
Most centralized exchanges follow a similar model, so let’s see what makes them stand out.
- KYC is a requirement – A centralized exchange requires platform users to undergo a Know Your Customer (KYC) process during the opening and maintenance of accounts. The user’s credentials are collected to verify their identity and evaluate their risk profile. Minimum requirements include name, date of birth, and ID number.
- Relies heavily on order book matching technology – A centralized exchange uses an order book matching system to facilitate cryptocurrency trading. It basically matches buy and sell orders and focuses on the best execution. The algorithm used varies from system to system.
- More liquidity & lower concentration risk – A centralized exchange has higher liquidity and lower concentration risk because it has higher trading volumes. Additionally, it has access to regulated market makers. The presence of liquidity protects both users and the cryptocurrency exchange from the effects of huge price swings.
- User-friendliness – Top-rated centralized cryptocurrency exchanges are easy to use and provide educational resources to help newcomers get by in the cryptocurrency ecosystem. They don’t require specialized knowledge.
Unfortunately, centralized cryptocurrency exchanges are highly vulnerable to cybersecurity threats, don’t allow users to transact with full anonymity, and don’t offer control over crypto wallets. Your account can be frozen or support can be suspended for certain cryptocurrencies. As they’re designed for maximum profitability, centralized cryptocurrency exchanges can lead to conflicts of interest between platform owners and users.
What Is a Decentralized Cryptocurrency Exchange?
As the name suggests, a decentralized cryptocurrency exchange is controlled by technology protocols that allow large groups of people to make decisions and achieve consensus. E.g. Uniswap. No single entity has control over the platform once it’s set up. Smart contracts and decentralized apps are leveraged to automate transactions and trades. Original creators, as well as people running the platform, can hold a native token, which enables them to vote on changes to the platform. You can buy, sell, or trade any cryptocurrency you can think of on a decentralized exchange, but pay attention to the fact that it integrates with only a few forms of fiat money.
If you’re curious to know how a decentralized cryptocurrency exchange differs from a centralized one, please continue reading.
- Supports peer-to-peer trading – A decentralized cryptocurrency exchange is designed to support peer-to-peer trading, so users can buy and sell directly with each other on the platform or mobile app. It achieves this by removing the intermediary. Users can use their preferred payment method and seal the deal at a price that both parties agree on.
- There’s no need to create an account – Users aren’t required to create an account or provide personal information. Users rely on self-custody wallets to accomplish transactions. While it’s not necessary to supply personal details, it’s essential to write down the seed phrase and keep it in a safe place.
- Users maintain autonomy over their private keys – By retaining full control over the private keys, users have complete control over their cryptocurrencies, but they’re also responsible for the autonomy of their funds. With a self-custody wallet, the digital assets are stored at a digital address or a wallet.
- Completely private and anonymous – Users can buy, sell, and trade cryptocurrencies like Bitcoin without revealing their identity, effectively hiding their connections. Since there’s no personal information attached to the transaction, the risk of identity theft is inexistent. A decentralized cryptocurrency exchange relies on consensus algorithms to verify transactions and prevent double-spending.
Regrettably, decentralized cryptocurrency exchanges tend to experience low liquidity levels due to their smaller user base and trading volume, can be harder to navigate as they’re more technical in nature, and users must purchase the native token to pay for gas fees. If there’s an issue, such as a cyberattack, users are on their own. Digital asset losses are possible due to errors, so novice investors might find it challenging at times.
The Verdict: Which Is Better?
Centralized and decentralized cryptocurrency exchanges have a lot to offer, so go with the one that best matches your needs and preferences. Even if there are many factors to take into account, security should come before anything else. In other words, you want guarantee your crypto holdings are protected to the highest degree. Moreover, don’t disregard any option before checking out the platform’s interface, as newer exchanges have made efforts to make their applications simpler to use and understand. Technological advances will play a crucial role in the development of cryptocurrency exchanges, streamlining the transaction process and enhancing operational effectiveness.