Table of Contents
- 1 Understanding centralized exchanges vs. decentralized exchanges
- 2 Advantages of centralized exchanges:
- 3 Advantages of decentralized exchanges:
- 4 Trader benefits of trading using decentralized exchanges:
- 5 Why blockchain companies use decentralized exchanges
The popularity of the decentralized technologies have already started kicking off with the numbers speaking for themselves. The total market capitalization has reached significant records as transaction volumes have skyrocketed and the general adoption of the public has increased on a global scale.
Blockchain technology is slowly bringing the world to a trustless economy where there is no need for third parties for exchanges to happen. The general currency exchanges of today are often centralized and have shown flaws over the years. How many times have you heard of banks “making mistakes” or getting hacked?
This is the problem with centralized currency since the third party also adds more to the vulnerability of the cryptocurrency exchange. Exchanging centralized currencies can also be subjected to harsh fees and high regulatory risks.
Understanding centralized exchanges vs. decentralized exchanges
Centralized exchanges generally keep their systems off-chain. This means that they work as escrows for their clients and transactions aren’t recorded on the blockchain like with cryptocurrency. This actually leads to massive security breaches and even unsafe storage information, unsafe funds, and even unsafe private keys.
Blockchain, on the other hand, with decentralized exchanges, aims to fix the problem that plagues centralized structures by building a type of peer-to-peer marketplace directly on the blockchain. This allows the trades to remain the main custodian of their own funds.
Building a total decentralized and efficient exchange still seems like a utopia today. Exchanges are generally centralized due to them being the simplest way for transactions to proceed. It is both complex and costly to build a fully decentralized platform. There are actually newer hybrid models that exist between centralized and decentralized marketplaces which try to deliver the best of both worlds.
It is important to be fair with centralized and decentralized exchanges since both sides of the coin have their own advantages.
Advantages of centralized exchanges:
1. Easy to access
Centralized exchanges or CEX makes it much easier for users to make accounts or even buy their own cryptocurrency. They help
2. Are licensed
Centralized exchanges oftentimes have their own licenses and run through government regulations. This provides the trader some sort of assurance should something suddenly go wrong.
There are advantages to having a middleman and it is that they hold the currency for both parties until they finish their bargain. This means there is no worry about the transaction after both parties finalize the trade.
There is a way to contact each other which makes reaching either party easier if required.
5. Discounts or bonuses
Trading large amounts of either fiat currencies or cryptocurrencies to fiat currencies can give the traders discounts.
Advantages of decentralized exchanges:
The good thing about decentralized exchanges is that they do not need any third party to operate. This allows both parties to retain their privacy and consumer information. While centralized exchanges might ask for proof of identity, emails, phone numbers, and other details, decentralized exchanges facilitate transactions without having to reveal the sender and recipient.
Cryptocurrency is encrypted for a reason and this is to protect the asset, the sender, and the recipient all at once. Due to the encryption, the holder of the asset has complete control over it.
3. Decentralized servers
Data is stored throughout different servers and not all in one place. The data is stored in a number of servers that exist all around the world. This means that in order to hack the data, hackers will have to have access to the multiple servers which is highly impossible.
The asset is only transferred from the sender to the recipient which means it cannot be stuck somewhere in-between. Due to the lack of a third-party, the currency can’t be “lost.”
Due to the encryption, nobody else has access to the asset being sent. Encryption works by scrambling a message, asset, or code when it is being sent and only decoded and unscrambled for the recipient alone.
Trader benefits of trading using decentralized exchanges:
These benefits directly affect the trader with every transaction made. Although decentralized exchanges might be a bit more complicated compared to centralized exchanges, learning them and transacting through them allots the trader a significant advantage.
1. More control over the exchange
When traders have more control over the transactions, the asset is more protected and does not need to go through third parties to complete a transaction.
2. Trade can be carried out without much regulations
This means the trader won’t need to comply with the hefty identity requirements most centralized exchanges would require.
3. The transaction can be done in an instant
Depending on the amount of the transaction, centralized exchanges can take a significant amount of time before they are carried out. The exchange is instant when done on a decentralized exchange.
4. Trader won’t have to pay extra fees
The problem with third parties is that although they might provide convenience, they do so at a price that can sometimes be quite hefty.
5. No problem with big amounts
Big amounts can be sent in an instant wherein centralized exchanges might hold the transaction for a significant amount of time for validation and other reasons.
Why blockchain companies use decentralized exchanges
Decentralization provides benefits for banks, laws, and even other third party providers. For these reasons, more and more institutions and other third parties have started to adopt decentralized exchanges as a safer way of transfering data. The thing about blockchain decentralization is that it is not limited to cryptocurrency alone.
Although decentralized exchanges might not be too user-friendly in comparison to centralized exchanges, they are slowly becoming more accessible to the modern trader. With the popularity of cryptocurrency growing, more and more people are starting to learn more about blockchain technology and decentralized exchanges.
The switch to decentralized exchanges is a must for cryptocurrency users to be able to exploit its full potential. Centralized exchanges will actually shift towards decentralized technology later on due to the need for a more sustainable exchange. When that shift happens, users can expect improvements from both sides of the coin.