There has been a lot of buzz with regards to decentralized and centralized crypto exchanges. The decentralized versus centralized debate has been all the rage as of late. To understand this debate, let us analyze definitions of crypto exchanges in layman’s terms.
Let us first take a look at a few of the salient features of centralized crypto exchanges (CEX):
- These platforms are connected to third-party operators
- Fiat currency transactions are permitted
- Market makers and takers are included
- Until the cash-out or coin pull takes place, entries will be in the database for a majority of the time
- There will be a higher volume of transactions
- Due to an absence of crypto node updates, trading speeds are quite fast
- Liquidity is more comfortable
- Solid KYC (know your customer) and AML (anti-money laundering) protocol
- Private keys logged in the system and connected with user credentials in the crypto exchange app
- Susceptible to hacking/cracking of the system
The following are a few of the salient features of decentralized crypto exchanges (DEX):
- The concept of third-party operators is not present here
- They do not permit fiat currency transactions
- Direct updating of trade transactions on crypto nodes. There are no database entries
- There is a lesser volume of transactions
- Low speed in trade
- Liquidity is a problem
- No KYC and AML protocol
- Absence of private keys in the app
- Usually not the first target of hackers
CEX and DEX can be contrasted on a variety of parameters.
Security: DEX is a much better option in terms of security, as private keys are not included in the app. In CEX, usernames can be recovered. Due to the presence of loose key and hardware in DEX, the asset cannot be recovered.
Third-party operator: CEX functions with a third-party/authority body, and this is opposed to Satoshi Nakomoto’s primary objective for cryptocurrency.
Transaction speed and volume: CEX is much quicker and higher in volume than DEX.
Regulatory necessities: CEX imposes KYC and AML protocols to simplify regulation. This factor also goes against Satoshi Nakomoto’s primary objective.
User experience: CEX is user-friendly, accessible, and easy to use when contrasted with DEX.
In the current market, 99% of crypto exchanges are the centralized variety. Lesser innovations and bottlenecks in tech are barriers to DEX’s popularity. Besides the facts and question marks regarding security aspects, CEX is the prevalent and popular system today.
The era of DEX, however, is not far away as developments and advancements are happening on an everyday basis.