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Centralized Exchanges vs. Decentralized Exchanges

Let’s say that you’re just a regular person with a job in Canada but are interested in the world of crypto trading. How do you go about it? Well, a quick look will show the high rates at which regular people are joining the fray. This is especially true in Vancouver, British Columbia, which is considered a crypto hotspot and had the nation’s first of over 1500 crypto ATMs. This shows that residents have placed considerable emphasis on prioritizing between centralized and decentralized exchanges according to the Rates website.

So, what exactly is it that separates the two categories? Why is one a better choice than the other? These are questions that can only be answered after a deep dive. From this, you’ll have a better understanding of why this field has been spreading at rapid rates. Most importantly, let’s check which exchange can suit you.

Viewing them separately

To get a proper idea of which exchange to choose, you’ll need a complete view of both the centralized and decentralized categories. Below is a look at these variants as a whole, exploring what they are and how they operate:

Looking at CEXs

Centralized exchanges or CEXs are crypto trading platforms that function via intermediaries that facilitate trade between users. Said intermediaries are responsible for overseeing all activity and ensuring that things go off without issue.

A user that’s dealing with these platforms will typically have an account. Said account has a wallet in which crypto is to be deposited. At this point, everything is in the hands of the organization, which safeguards all assets. In addition to this, they have a proper regulatory system, which makes things easier to track.

Proper regulations can be advantageous and when it comes to the benefits of CEXs, the following are equally notable:

  • They are generally user-friendly
  • Liquidity isn’t usually an issue
  • They can allow fiat-to-cryptocurrency exchanges such as the Canadian Dollar to Bitcoin and vice-versa
  • They often have a large number of trading pairs
  • Transaction times are favorable

Though beneficial in the above ways, CEXs come with some notable drawbacks as well. These include the following:

  • Regulations place limitations on users operating in regions deemed unsuitable
  • A centralized system is easier to hack into
  • The cost of all CEX transactions is high due to the presence of a middleman

There are several CEXs currently operating out there. Some of the most popular ones include the likes of Kraken, Coinbase, eToro, and Binance among others.

Looking at DEXs

Decentralized exchanges on the other hand function without intermediaries, as they are entirely dependent on blockchain technology. With the addition of smart contracts, all functions are automated and made public for all to see. As such, all transactions occur directly with control firmly in the hands of users. Because control belongs to users, they’re responsible for their assets and not the platform. This means that even the security of said assets is their responsibility.

Once a user has gotten into the system and has an account and wallet, they would proceed to deposit crypto. Afterward, the use of peer-to-peer technology allows transactions to occur based on the prices figured out by automated market makers or AMMs.

DEXs are a worthy alternative to their centralized counterparts for several reasons. Some of these include the following:

  • Lower transaction fees
  • Better protection against hacking
  • No regulation-based issues

Having said that, a few prominent drawbacks need to be mentioned in case you want to pick this route. The most prominent of these include the following:

  • They aren’t ideal for beginners
  • Slow down of the network-based exchanges
  • They don’t allow fiat trades

DEXs have also grown in popularity in their own right, with several platforms doing quite well. Some of the most notable include the likes of Uniswap, Curve Finance, Sushi Swap, and dYdX.

What else makes them different?

It’s pretty safe to say that the above information gives a rather detailed look at each category and from it, you can see the obvious differences. However, there is one thing that might not be so plain to see and that comes in the form of how both deal with the safety of wallets.

The regulations of CEXs make trading on them safer, despite the exposure to hackers, which quality platforms are equipped to handle. This does come with you giving your assets over to them to take care of, which you may not be comfortable with.

DEXs on the other hand don’t face hacking issues as much and in the hands of knowledgeable users, wallets tend to be fairly secure. Unfortunately, regular users aren’t as well-learned, which makes things hard for them and this doesn’t even cover the potential liquidity issues. Impermanent loss is also another risk that anyone venturing into the DEX world has to think about.

What choose the big players

If we speak of the cryptocurrency niche, you can see a solid battle between these two titans: CEX and Decentralized Exchanges. As you can mention, both have their own unique strengths and disadvantages, however, right now the CEX (their platforms like Binance, Coinbase, etc.) could seem to be ruling the scene. According to statistics, it’s commanding over 75% of the trading volume. Sure, it is all about accessibility and management that users are used to. DEX platforms are also considered to be a new innovative thing.

At the end of the day, CEX offers a user-friendly experience where you can quickly jump right into action. It gives institutions the peace of mind they need when handling large volumes of transactions. Big financial players, like banks, are seeking reliable old-school solutions that can handle their massive demands.

Final thoughts

When it comes to deciding between a CEX and a DEX, the above information will help you discern what fits. In any case, all bases should be covered before making a decision, especially because the value of your assets isn’t something worth losing haphazardly.

Either exchange could work, as both come with their own sets of benefits. Both also possess notable drawbacks that could lead to catastrophic results if overlooked. So, before you choose between the two, understand as much about them as possible and see if either fits what you’re capable of. In doing so, you limit the amount of risk you’re exposed to and can focus on being profitable.

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