Centralized vs Decentralized Exchange
Centralized exchanges hold user’s funds whereas in decentralized exchanges (DEX) users hold their fund in their own wallet.
Cryptocurrency is now the go-to destination for people looking to invest in the future of money. Investors are flocking to crypto exchange services to buy the crypto assets. With the surge in cryptocurrency market, traders are interested in Cryptocurrency Exchanges to carry out trading on a larger scale. With promising development on the blockchain, these exchanges allow for safer and profitable trades.
People should understand what are the advantages and disadvantages of the centralized and decentralized exchanges.
Centralized exchanges are like traditional banks today: they have owners, they follow rules, and they’re regulated. They hold the private keys of the user’s crypto assets. Therefore, this creates a centralized point of failure on the security front. If the exchange gets hacked, then all the users’ funds are stolen. In the past, many centralized exchanges had been hacked and the users of the exchanges had suffered the losses.
The same thing happened with HitBTC. Traders on HitBTC, a centralized exchange with a trading volume of around 40,000 BTC, had noticed that withdrawals had been temporarily disabled for their account when they tried to withdraw their BTC.
Centralized exchanges can also restrict users on the basis of some company terms. Most exchanges require KYC of their users, which exposes the individuals for different types of cyber threats.
On the other hand, these exchanges have been designed to be highly user-friendly. Also they provide lots of features to the user. So, one must be aware of the risks associated with centralized exchanges: they can be compromised, which could result in funds being lost.
By now, you know the pros and cons of centralized exchanges. Decentralized exchanges came as a godsend strategy to eliminate Proof of Keys and let you remain the true owner of your assets!
If you are wondering what is a decentralized exchange, this is an exchange that allows users to control the custody of crypto funds. Furthermore, it does not have a central authority controlling the platform.
Decentralized exchanges are built upon the AMM protocol, where a smart contract facilitates all the exchange of tokens. This protocol was initially popularized by Uniswap, it includes a liquidity pool and swap contract. Anyone can list a token pair on a DEX without taking permission from the central authority. To list a token on a DEX is as simple as water, you just need the smart contract of the token, some tokens that you want to list and some base tokens like ETH, BNB, USDT, etc to form a pair. and Also, anyone can add liquidity to any pair available on a DEX, consequently earn liquidity provider fees. On every transaction on the DEX, users pay fees, which gets distributed to the liquidity providers of that pair.
The key reason why decentralized exchange can be a better option than centralized exchange:
A centralized exchange typically charges a percentage of the transaction fee, but a DEX operates on a per-trade fee mechanism!
No KYC requirements:
Decentralized exchanges do not require users to sign up or login in order to use the platform. The AMM protocol just needs connection with the user’s crypto wallet. For any transaction on the DEX, the wallet owner needs to approve the transaction every time. DEXes doesn’t allow fiat onboarding or off-boarding, neither they hold any user data, so the KYC is not applicable on these platforms.
You are the owner:
Ownership of assets is another feature of a decentralized exchange. When an exchange is centralized, ownership of the coins is completely held by the exchange itself. Furthermore, retaining the keys in exchange for the execution can lead to faster execution since no access to the keys is required. This, however, could result in crypto theft.
We have a real-world example. A hack on Coincheck Exchange led to the theft of $523 million in 2018.
Decentralized exchanges prevent these types of hacks. But with all the advantages one must be very responsible while trading on decentralized exchanges because no one is there to provide support to you like the centralized exchanges. If you lose your wallet keys, your funds are lost forever.
DPAD is building a decentralized protocol for crypto launchpad where anyone can raise funds for their business idea. The whole process on DPAD is decentralized and user controlled. DPAD supports the decentralization of crypto, true ownership of crypto assets. Learn more about DPAD on the following links: