What’s the deal?
If you would like to trade cryptocurrencies in today’s marketplace, you’ll be faced with 2 options; Decentralized and Centralized Exchanges. There is still some uncertainty among traders with regards to what are the key differences between the two types of exchanges, and which ones can be trusted.
To get a better understanding of how they both work, we at SEEDDEX are going to explain some of the crucial contrasts, and more specifically we’ll look at usability, security, business models, liquidity, and regulations. So without further ado, let’s get to it.
Decentralized
Decentralized exchanges, otherwise know as DEX, operate on a peer-to-peer (P2P) platform. There is no need to register private information because there is no middleman, sometimes called an intermediary, involved in the transaction process. This is crypto trading in its purest form.
To give an example of how this works, let’s say you want to purchase 10 tokens. Your order will be directly matched with another trader who also wants to sell 10 tokens. At SEEDDEX we have developed our own algorithm based on blockchain technology called SEEDECON to facilitate this entire process, so there is no need to for any intermediary involvement.
Centralized
Centralized Exchanges, often abbreviated to CEX, have a company act as a middleman to facilitate trading on their platforms. In exchange for providing this service, the intermediaries collect trading fees.
CEX are often the first port of call for new traders as in general they are more user-friendly and many users want to have an interface that connects them to both cryptocurrency trading and the real economy. The operation is like DEX, but rather than the trade being P2P, the middleman will hold the funds until an order seller is matched with an order buyer.
Usability
The general consensus of DEX is that they are not very simple to use. Many online resources recommend that DEX are only for very serious or advanced traders. Therefore, many beginners flock to CEX when first starting out. However, as we mentioned earlier, with our new SEEDECON technology, using a DEX has never been simpler. We have streamlined and improved the entire trading process.
Nonetheless, DEX are still lagging in comparison to CEX when it comes to trade times. Traders still must wait for cryptocurrency transactions to complete before a trade can be finalized, therefore traders that require fast trading times to capitalize on market fluctuations will find it more difficult to do so on DEX. Also, DEX currently do not offer advanced trading functionalities such as margin trading and stop losses.
Security
Unlike CEX, DEX are not controlled by a single entity, meaning there is no centralized server maintaining a list of customers’ accounts, login details, balances, and so on. DEX connects an unspecified number of nodes, all participating in the network, which all use the blockchain to process trades and information. Since DEX has no single entity there is no central point of weakness, and that is why DEX are known as “trustless”, which might sound like an odd phrase, but in layman’s terms it essentially means nobody must trust anybody else for the system to function, it simply just works.
DEX allow users to have full control of their funds and they always remain in control of their private keys to those funds. On the other hand, users who hold or trade funds on CEX do not control their private keys, the exchange does. There have been cases in the past where several billion dollars worth of cryptocurrencies have been lost. Whether these exchanges were hacked or if it was an exit scam strategy, customers funds vanished without a trace.
Business Models
As we stated earlier, CEX rely on customers fees. This is their main source of revenue. They charge relatively high fees to execute trades, especially if you use FIAT-to-cryptocurrency trades, although it should be noted that DEX does not yet support FIAT currencies at all.
CEX also make money regardless of if the market goes up or down. With DEX, the absence of an intermediary allows for non-existent or very small trading fees. It depends on their exchange and their protocol.
Liquidity
At the present moment, DEX are simply not as well known as CEX. This can make trading on DEX an issue due to its smaller audience, and thus they a lower trading volume than CEX. This means that finding an acceptable trade can be a difficult process which impacts liquidity. Lower trading volumes make it harder to buy and sell cryptocurrencies and liquidate.
SEEDDEX currently offer the best liquidity of all DEX, and we support ERC20 tokens, yet CEX still have the upper hand in the fact that they can support all token and coin types. Plus, to liquidate cryptocurrencies into cash, as of right now traders still have to rely on a CEX that deals with cash.
Regulations
CEX are highly regulated. First, you must be approved by the exchange if you want to use their services. This is known as “KYC” or Know Your Customer. To verify your identity many CEX will request a copy of your ID or passport and proof of residence before you can trade. This process can take quite some time and you will have to wait until you get approved to use the platform. In stark contrast to this, if you wish to remain anonymous and start trading right away, DEX is the way to go.
Got the gist?
With the creation of blockchain, we believe the primary objective of cryptocurrency trading is decentralization and the advantages that come in tow. Things haven’t exactly carried over that way relating to how most users are conducting trades. Somewhere along the way, the philosophy behind the blockchain has been dismissed by the majority.
For the time being, most DEX continue to be overlooked for their CEX contemporaries. SEEDDEX believe we can help to change that by remaining true to the essence of the technology. As the development of the blockchain progresses, it may be likely that we see some shift in preference to more decentralized models.
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