Centralized vs. Decentralized Crypto Exchanges
How centralized and decentralized exchanges work, what the pros and cons of each are and how they compare to each other.
Centralized crypto exchanges
Let’s start with centralized exchanges, also known as CEX. Centralized exchanges are run by a central party, which oversees and manages all the transactions between the users. The overseeing company is also responsible for maintaining the platform and fixing bugs, providing liquidity and arbitrate the disputes. For that, they will collect fees from the users, which is dependent on the exchange. CEX are therefore similar to traditional exchanges like the NYSE, Nasdaq, LSE or SIX.
The biggest pros of centralized exchanges are:
- Better liquidity (if market makers are present to fill the order book)
- Easy to use thanks to user-friendly interfaces
- Instant transactions for crypto to crypto pairs
- Wider diversity of services
The biggest cons of centralized exchanges are:
- CEXs are considered a honeypot by hackers who are very incentivized to attack these platforms. This is mainly because all funds, coins, and data of the users are stored centrally.
- The users of a centralized exchange are subject to counterparty risk, because they are not in the possession of their coins or funds.
Decentralized crypto exchanges
A decentralized cryptocurrency exchange, also known as a DEX, is a trading platform that does not hold investor funds. Instead, digital asset trades occur directly between the two transacting parties on a peer-to-peer basis and are settled on the blockchain. The value proposition of a decentralized exchange holds the ideals of the blockchain movement by allowing buyers and sellers to find one another and trade directly on-chain without a third-party intermediary.
The biggest pros of decentralized exchanges are:
- Better security (allegedly, there is still a lot of work to do)
- DEXs route orders and information through a peer-to-peer protocol in a manner that is scalable.
- Low fees or none.
- Censorship resistance: there isn’t any central counterparty who can control the platform and users don’t lose their private keys, meaning that nobody can censor the trades.
The biggest cons of decentralized exchanges are:
- Low liquidity
- Complicated and not easy to use
- Tight trading limits, so it is difficult to trade big amounts
- No fiat to crypto pairs
Comparison
Volume:
The volume in the centralized exchanges is significantly higher than in the decentralized exchanges. Currently, more than 95% of the total trading volume in the cryptocurrency market is traded on centralized exchanges.
Security:
Centralized exchanges are prone to attacks from hackers, because the coins and the data are stored in one centralized wallet there high amount to steal for the hackers. On the other side are decentralized exchanges where the trades are on-chain and peer-to-peer, which means it is nearly impossible to steal anything. I say nearly impossible because Bancor, a decentralized exchange, has been hacked and the hackers have stolen 23.5Mio in cryptocurrencies.
Regulation:
In some countries, for example, Switzerland, Japan or USA crypto exchanges have to be regulated to be able to operate in that country. Decentralized exchanges, however, are not regulated because there is no one to regulate.
Usability:
Centralized exchanges offer generally a user-friendly interface and more services and are therefore easier to use as decentralized exchanges. Especially for beginners, it is easier to start with a centralized exchange.
Costs:
Decentralized exchanges are much cheaper, and in some cases, there are zero fees. This is because the trades are executed by a smart contract and peer to peer and not by a central company.
SCX | The best of both worlds
- Multilateral trading platform with integrated market makers
- Partnership with Dukascopy Bank — fiat to crypto pairs with instant settlement.
- Eliminate the counterparty risk — trade directly from your bank account without having to send the money to the bank of a centralized exchange.
- Integrated a secure storage provider — every client has their own cryptocurrency wallet,
- Regulated under the Swiss law — headquartered in Zurich, Switzerland.
- User-friendly interface.
Try it out at www.scx.ch
Swiss Crypto Exchange
