With the market value of cryptocurrencies surging, investors and traders are now demanding a cryptocurrency exchange platform for them to rely on. Crypto exchanges play an important role in the digital currency industry, especially in the development of the blockchain industry.
In general, cryptocurrency exchange platforms allow investors and traders to buy, sell, and trade digital currencies at an instant, and it typically supports several different cryptos to have well-established trading. In this article, we’ll explore the two types of cryptocurrency exchanges and compare the two with all the advantages and disadvantages that come along with them.
The Difference Between Centralised and Decentralised Exchanges
With the rise of digital currencies, the cryptocurrency exchanges would be the next hot topic of the town, but to get a better understanding of different exchanges, we must compare the two.
In general, centralised crypto exchanges operate similarly to the banks we know today, such as having an owner of the bank, a safe to store all the funds to, and a set of rules and regulations to follow when interacting with the bank. Despite centralised exchanges being in existence for many years, the decentralised exchange concept is what people are talking about these days.
However, there are significant risks involved when dealing with centralised exchanges as the platform can be easily attacked by experienced hackers, thus losing all of your funds in the process.
Also, since centralised exchanges have a single entity to overlook all that’s happening in the platform, there’s a chance that the entire exchange would disappear overnight without any other entity to answer why. On the other hand, decentralised exchanges are a platform that allows users to have complete control of their cryptocurrency funds without any third-party entity looking over the process, similar to how governments and banks work.
The Centralised Crypto Exchanges
As the name suggests, the centralised cryptocurrency exchange platforms typically act as a third party in a crypto-related transaction between a buyer and a seller. In general, most of the crypto-related transactions would go through centralised exchanges, and people mostly choose this platform over the other because it offers more reliability. Some examples of centralised exchanges include GDAX, Gemini, Coinbase, and Kraken.
Advantages of Centralised Exchanges
As for the advantages of using centralised exchanges to do your crypto-related transactions, one particular aspect that attracts investors is how user-friendly it is. Unlike cryptocurrency wallets, which let users do peer-to-peer transactions that are daunting and complex, centralised crypto exchanges offer a user-friendly interface along with platforms that are relatively easy to use, making it comfortable to conduct cryptocurrency transactions at any given time.
Furthermore, centralised crypto exchanges are extensively reliable, and when it comes to digital currencies, the overall reliability of the exchange is one of the primary concerns of traders and investors. Especially the investors and traders that participate in an environment that are more uncertain than the ones in traditional bonds and stocks. This is where centralised exchanges have an advantage as they provide extra layers of security when it comes to doing crypto-related transactions and trading.
Disadvantages of Centralised Exchanges
With the advantages mentioned above, centralised cryptocurrency exchanges also have a set of risks involved. One of which is the potential of getting hacked, and since centralised exchanges are typically handled by a single entity, they will be the only one responsible and will be held accountable for their customer’s holdings. With that in mind, they are highly likely to be attacked by hacking or have some sort of cybersecurity risk.
Another disadvantage that centralised exchanges have is their transaction fees; these exchanges charge you a hefty amount of fees for all the services they provide. Unlike equity, taxation does not apply to centralised exchanges with all crypto-related transactions, and these types of charges that are imposed by centralised exchanges create an important financial cost. Take Binance, for instance, the platform imposes a transaction fee that ranges from 0.012% to 0.1%.
The Decentralised Crypto Exchanges
Decentralised and centralised crypto exchanges have their similarities; however, they might differ in some key aspects. For instance, decentralised exchanges allow its user to conduct peer-to-peer transactions without the need of a third party entity overlooking the process; however, they don’t facilitate trading fiat currencies to digital currencies. Some good examples of decentralised exchanges are Tokenlon, 0x Protocol, Uniswap, and Venus.
Advantages of Decentralised Exchanges
The decentralised cryptocurrency exchange has a lot of advantages, and the most important one for traders and investors is the capability to be anonymous. Unlike centralised exchanges that require their users to fill out a KYC(Know-Your-Customer) form, decentralised exchanges offer complete anonymity while providing privacy.
Furthermore, decentralised exchanges become the perfect alternative to traders and investors who are generally concerned about hacking as they don’t need to transfer their funds to a third-party entity. Also, since decentralised exchanges allow users to interact in peer-to-peer transactions, all participants of the transaction are protected from any form of market manipulation.
Disadvantages of Decentralised Exchanges
Despite decentralised exchanges having remarkable advantages, it also has their cons that you would need to consider before choosing. First of all, decentralised exchanges typically lack fiat payments as they don’t allow digital trading currencies with fiat currencies, thus making it inconvenient to transact for people who don’t currently hold cryptos. Another thing to consider is the exchange’s complexity; as mentioned before, centralised exchanges provide their platform for users to utilise with friendly features.
Decentralised exchanges, on the other hand, demand their users to familiarise the complex process that they offer. Last but not least is the exchange’s liquidity as there are only a few people who transact with decentralised exchanges, thus may provide constraints from time to time. With that in mind, users of decentralised exchanges may be unable to transact with their funds at a moment’s notice.
Conclusion
The bottom line is that digital currencies are still relatively immature, especially when comparing them to other classes of investment assets, including commodities, bonds, equity, currencies, and more. With that in mind, cryptocurrencies can be extremely volatile; however, digital currencies have substantially increased over the past few years as their market participation was fueled by crypto’s anticipated potential and high levels of liquidity. Regardless, centralised cryptocurrency exchanges take the majority of crypto-related transactions and are seeing a significant increase in both retail and institutional participation all over the world. If you want to know more, you may visit Crypto Engine.
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