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What’s the Difference? Centralized vs. Decentralized Exchanges

INTRODUCTION

Cryptocurrency Exchanges are used as platforms that facilitate the trading of cryptocurrency, digital, and fiat currencies, much like traditional stock exchanges facilitate the trading of non-cryptocurrency stocks. Cryptocurrency exchanges are relatively young compared to stock exchanges. Traditional Stock exchanges date as far back as 1531 in Antwerp, Belgium whereas the younger Cryptocurrency Exchanges date back to 2010, with the famously known Mt. Gox Bitcoin exchange. As a beginner to crypto investing, there is a monumental amount of information that you will need to learn, in order for you to make well informed decisions about what type of investments or platforms you can/want to use to execute those investments with. The question is, what works best for you? As well as, what platforms meet your expectations? Questions and answers such as these are paramount for you to understand before you begin your cryptocurrency journey and start investing. In this article, I will give you a brief description and try to explain the difference between both types of exchanges, the pros and cons of each. All in the attempt, for you to understand the choices that are out there for you to successfully achieve your goals.

CENTRALIZED EXCHANGES

Let’s start with Centralized Exchanges (CEX). Centralized Exchanges act as a third party between buyer and seller; much like a bank where there is a person involved between you and your money. CEX essentially works the same. The majority of all cryptocurrency transactions are done through CEX, due to user confidence, reliability, and user friendly integrations. Coinbase, Kraken, and Gemini are some examples of CEX. Even with the reliability of using a CEX, there are some things to take into consideration for example: they are not discrete in order to use their trading platform and establish an account. Centralized exchanges require you to fill in some personal information. They do come with disadvantages, they have cyber security issues and are prone to hacking attacks. For example: Mt. Gox used to be one of the biggest and most trusted CEX, until it suffered a massive hacking attack in 2014. The hack resulted in a loss of over 850,000 Bitcoin, with over $460 million in customer assets being stolen in a single attack! The hack was so massive that the exchange had no choice, but to declare bankruptcy. Another point that is relevant to make about the advantages to buying on a CEX is the fees you will pay are much lower and somewhat reasonable, as opposed to a Decentralized Exchanges (DEX) that charge their own fees, along with gas fees that can be significantly higher than those fees from CEX, The last thing I will elaborate on, is that with CEX there is a small risk of market manipulation and your information can and will be shared with such institutions, such as the IRS for tax purposes.      

PROS

  • The majority of all cryptocurrency transactions are done through CEX, due to user confidence, reliability, and user friendly integrations.
  • Easy to use buy, sell, or trade. 
  • Lower trading fees. 

CONS

  • They are not discrete and require personal information to establish an account.
  • They have cyber security issues and are prone to hacking attacks. 
  • Small risk of market manipulation.
  •  Information can be shared.

DECENTRALIZED EXCHANGES

A Decentralized Exchange (DEX) is a non-custodial (no middle man) type of exchange that makes peer to peer transactions easily performed, without the need for a third party. On the other hand, Decentralized Exchanges (DEX) do not facilitate the trade of fiat currencies to cryptocurrencies directly and require you to trade assets directly from the native contract blockchain that your  asset belongs to. It is a little more complicated to trade this way, but with a little practice it can be easily done. There are many advantages to trading this way such as: DEX wallets are nearly impossible to hack and are much less prone to hacking attacks than a centralized Exchange (CEX) wallet . With that being said, even though they are nearly impossible to hack, there is still a risk you will take if you don’t exercise properly storing and safekeeping of your private keys. A private key, AKA-seed phrase, is a list of 12 to 24 random words that will be issued to you upon opening this type of wallet. It is imperative that you treat this seed phrase as a key to your safe! Without it, you will never be able to recover your assets and on the flipside, with it, anyone that has access to this seed phrase can do anything with those assets, including transferring them to a different wallet, which would be irreversible and can be lost forever. So you need to guard this key phrase and keep it in a safe place and never share this information with anyone you don’t trust. DO NOT ever store it on your phone and DO NOT take a snapshot of it, DO NOT message it to yourself or anyone else. It’s best kept safely written down on a piece of paper, stored away in a safe place that you will remember where to find it, should you ever need it for anything. I will also add that Decentralized Exchanges (DEX) have less hacking risk, less market manipulation, and come with the perk of anonymity, where no personal information will be collected in order to establish a wallet account.

PROS

  • No middle man.
  • Nearly impossible to hack and are a lot less prone to hacking attacks.
  • You have more options to buy a wider range of cryptocurrencies.
  • Less market manipulation.
  • Anonymity ( no personal information collected).

CONS

  • Takes a little practice to learn how to trade this way.
  • Does not facilitate the trade of fiat currency directly.
  • Without seed/key phrase assets are impossible to recover if lost
  • Higher trading/gas fees.

*When choosing to trade on a Decentralized Exchange Should you lose your phone, tablet, or computer, don’t panic. Recovering your assets can be easily done by using your seed/key phrase from any device, as long as you have your phrase.

*Most assets can be bought on or can be customized and manually imported to a decentralized wallet; unlike centralized wallets, that mostly only allow you to buy and store assets listed directly on that particular platform.

 

CONCLUSION 

Knowing the difference between using a Centralized Exchange (CEX) vs. using a Decentralized Exchange (DEX) is important and relevant when you put your goals into consideration. In MY OPINION, and NOT FINANCIAL ADVICE, tokens/coins that are available on Centralized Exchanges (CEX) are lower risk, but can be less rewarding. Whereas buying tokens/coins using a Decentralized Exchange (DEX) can be high risk, as well as high rewarding. This is due to the fact that you are more likely to find projects that are at ground level or just getting started and you can potentially get in at a great price. With that information on the table, I will say that you and only you, can make that decision: high risk/high reward vs. low risk/low reward. The choice is ultimately yours! As always, this is NOT FINANCIAL ADVICE and you should NOT invest money that you are NOT willing to lose.

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The content on this website is provided for educational purposes only. The information contained in or provided from or through this website is not intended to be and does not constitute financial advice, investment advice or trading advice. You should not make any decisions based on any of the information presented on this website without undertaking independent due diligence and consultation with a professional broker or financial advisory.

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