In the simplest form, cryptocurrencies exchanges are marketplaces where you can trade one cryptocurrency for another cryptocurrency or fiat currency. What this means is that on a crypto exchange, you can exchange Bitcoin for Dogecoin, Ripple for Ethereum and many more. On some exchanges, crypto to crypto transactions are allowed while others allows both crypto/crypto and crypto/fiat transactions.
Fiat money is a currency that a government has declared to be a legal tender. These are government issue money that can be exchange for cryptocurrencies.
As an emerging market, cryptocurrecies are digital currencies that keeps growing fast despite the challenges it is facing which includes 51% attacks on blockchains, assaults on user wallets through malwares, hacks on exchanges, regulations issues and lesser mass adoption.
Due to the nature and purpose of operating exchanges, they are basically categorized into two based on their scope and functions they offer their users.
With the plethora of features available for traders to trade one crypto for other using advanced trading patterns and other market tools, there are certain limitations especially on user basis. Before trading can be done on centralized exchanges, a user will have to deposit crypto or fiat currency in his registered wallet and continue trading. Such includes Binance, Huobi, Kucoin, BitMart.
The word centralized already explains the fact that these are exchanges that are centralized because they control all the private keys of all users of their platforms. They ensure users comply with KYC (Know Your Customer) feature in order to enjoy more additional features on their platform. Centralized exchanges are very keen on their stand about Anti Money Laundering and Terrorism policies. User’s funds and accounts can be suspended while withdrawals placed on hold.
It is not recommended to keep funds for a long term purpose on centralized exchange wallets as the unexpected can happen especially in terms of security breach just like the Cryptopia Exchange hack that has made many users not have access to their funds. Read more on how to secure your crypto wallet from hacks.
These are exchanges that are decentralized in nature and does not necessarily need creating any account before transactions can be conducted. Users can execute trade directly from their main wallets and connect with other traders. A DEX has no central authority such BarterDex, Idex, Waves Dex, Radar Relay.
Using decentralized exchanges reduces fees as transactions are done from wallets to wallets with aid of the blockchain. It is difficult to hack a DEX as users have total control over their accounts and their private keys.
However, it is important to note that using DEX might be a bit tricky for some users as it involves some technicalities in some DEX unlike centralized exchanges that are more popular.
With the growing rate of direct and easy to use atomic swaps being incorporated in some DEX and wallets for users that might not want to go through the rigors of trading charts and would love to easily exchange one crypto for another, centralized exchanges will need to step up and not put unnecessary pressure on users because atomic swaps is growing everyday which is a welcome development in the crypto. Will DEXs take over from centralized exchanges as easy to use, fast and highly secure crypto exchanges? Time will tell.
Care to share your experience with using decentralized and centralized exchanges? Use the comment box below.