Everything You Need to Know About Centralised and Decentralised Exchanges
If you want to buy or sell digital assets, chances are you’ll be using an exchange. These are cryptocurrency trading platforms that connect buyers with sellers and provide them with tools to conduct transactions safely and efficiently. However, each crypto exchange operates in a unique way. The two main types are centralised and decentralised exchanges, each with specific benefits and limitations.
When buying bitcoin and trading cryptocurrencies, it’s extremely important that you know the difference between these two types.
CEXs are the most common type of crypto service. They also (usually) have the best design and user experience because they are owned and operated by private companies that charge you for using the platform. Some examples are:
Centralised exchanges are profitable businesses that have lots of money to spend on great software developers and UX designers. They are also competing with each other for your trading business. These factors mean that centralised exchanges are easy and intuitive to use, offer many useful features, are constantly updated, and have good customer support. The latter is similar to what you might expect from other online platforms, with account recovery and other helpful services.
The downside to centralised exchanges is that they are owned and operated by a private company or organisation. This means when you use it, you are trusting them with your money. This goes against the core idea of cryptocurrencies — decentralisation. That’s why we have decentralised exchange services.
Decentralised exchanges offer something completely different as they are not operated by a central authority or private company. Instead, they are essentially a protocol developed to do the job of an exchange. Buyers and sellers can come together using the DEX protocol and trade safely with each other with no middlemen involved.
Fees are often lower on DEXs, as there is no organisation making profits and paying high developers’ salaries. You never have to hand your funds over to a private company. They stay under your control and get transferred only when you trade under the exchange protocol. Also, no identity requirements are imposed by decentralised platforms, due to the absence of any authority. You can start trading without ID verification.
This might seem ideal at first. But, the main downside is that with no central authority, there’s less incentive and funds available to develop the platform. So, DEXs often have a more cumbersome user experience.
Aside from the main benefits and advantages mentioned above, there are many specific differences between CEX and DEX.
When using a centralised exchange, your funds are under the control of the central authority that runs the service. That means that if something bad happens to the exchange, you may lose the assets you had stored there forever. DEXs don’t have this problem. You maintain control of your account, and usually, you don’t even have to disclose your identity. This is achieved with the use of blockchain and smart contract technology.
The fees on centralised exchanges can be quite large. For example, Coinbase charges up to 0.5% for both buyers and sellers. There are also fees for depositing and withdrawing funds to cover the costs of developing and running the exchange, as well as for the company’s profits. For reference, Coinbase brought in $2.23bn of revenue in just one quarter of 2021.
A decentralised platform dYdX has maximum maker and taker fees of 0.05% and 0.1% respectively, and no fees for depositing and withdrawing. This is largely because on decentralised exchanges there’s usually no intent to make a profit. Fees are used just to cover transaction costs and stimulate liquidity. Of course, these are just examples, fees vary significantly between exchanges.
Decentralised exchanges are more difficult to hack — large amounts of funds are not held in a small number of accounts as they are with centralised services. Attacking a decentralised exchange requires hacking the blockchain and smart contracts it’s built on. Hacking a centralised exchange can be done through many more channels, including exploiting the employees running it.
Centralised exchanges are better able to maintain market liquidity than their decentralised counterparts. Firstly, this is because there are often more users. This higher liquidity causes faster transactions, more stable prices and, therefore, more market participants. But decentralised platforms don’t have as much liquidity because their decentralised order matching processes take more time to fulfill.
Due to the higher liquidity mentioned above, centralised exchanges also have faster transactions. The protocols of decentralised exchanges require more time to match orders while maintaining security and anonymity. This is a similar reason why BTC transactions take longer (about 10 minutes) than regular bank transactions (a few seconds or less).
Decentralised exchanges are growing and have many advantages over centralised ones, including lower fees, anonymity, and a lack of a central authority. Despite this, CEXs are still far more popular than DEXs because they provide a wider range of services and are easier to use.
So, the question is — do you prefer intuitiveness and liquidity or low fees, security, and anonymity? If it’s the former, choose one of the many great centralised exchanges available. But, if you want to take more responsibility for your trading, then a decentralised platform will allow you to trade with high security, low fees, and full control over your funds.