Since the rise of crypto space in last few years, there is massive amount of people getting involved in crypto trading, so as the rise of big crypto exchanges where individuals can trade their crypto coins for other coins. There are two types of exchanges where people can trade their crypto coins for other cryptos, stablecoins or for fiat currencies, one is centralised exchanges (CEX) and decentralised exchanges (DEX). Many new traders prefer to trade on centralised exchanges and are unaware of decentralised exchanges and many of them who are aware of DEXs are either confused or not comfortable using them. So in this article we will go through the pros, cons and the difference between centralised exchanges and decentralised exchanges, so you guys can have the enough idea and choose whatever suits your trading.
Let's dive in...! !
So here we will compare centralised exchanges and decentralised exchanges point by point and see what features do they offer and what they don't.
So beginning with the first step of trading, opening an account in an exchange.
For decentralised exchanges there's no need of any type of Know Your Customer (KYC) or AML (Anti Money Laundering) details. As decentralised exchanges are not governed by any institution or any specific company and does not fall under any government rules and regulations. This makes decentralised exchanges free from any one specific entity. Because of this freeness the DEXs are truly decentralised!!
But in case of centralised exchanges it is necessary to complete KYC/AML procedure in order to use all the features of exchange, this is because of centralised exchanges fall under the respective government rules and regulations. It becomes necessary for centralised exchanges to gather the user information to comply with these rules & regulations.
Decentralised Exchanges are censorship resistant and Centralised Exchanges go through the government censorship.
Liquidity, Assets Coverage
Liquidity plays an important role in the growth and adoption of any type of crypto exchange. Liquidity means how much funds do the exchange have to perform the exchange between two crypto coins. Due to the ease of using and performing exchanges well settled centralised exchanges have larger amount of liquidity for high market cap coins such as Bitcoin, Ethereum, BitcoinCash and many other. The coin listing on centralised exchanges goes through the check by exchange officials and everything is done carefully so only coins of settled project and high market cap coins gets listed on centralised exchanges. Hence the asset coverage on centralised exchanges is larger for large market cap coins.
Whereas due to the openness of coin listing and anyone can list their coins on decentralised exchanges, the lower market cap coins has the higher asset coverage. Due to this, the liquidity for small cap coins is comparatively arger on decentralised exchanges.
Key Point 💡
Only the large market cap coins make up to CEXs whereas DEXs are open to any type of crypto coins.
Security & Asset Custody
Security is also the very important factor while choosing an exchange for crypto trading. In case of centralised exchanges the custody of assets is completely goes under the exchange and so as the security of assets. The asset security is managed by the exchange itself but sometimes some crypto exchanges get hacked and all of the assets of an user gets hacked.
As earlier, we have seen that the decentralised exchanges does not have any entity to govern them and are open sourced. So the custody of your coins is completely yours and are accessible to you anytime from your wallet. The security of your coins is your responsibility. The decentralised exchanges doesn't get hacked but at the individual level you have to be caret with your backup seed phrases, passwords and private keys. And you have to be careful with phishing attacks which are generally used by hackers.
Key Points 💡
You don't have custody of your funds in case of centralised exchanges
You need to be careful with your wallet seed phrases and try to note them on paper.
Do not save seed phrases in digital format like screenshot or documents, as they're easy for hackers to hack.
The decentralised exchanges are not user friendly (UI/UX) and mostly the trades cost more on them so not very popular in small traders. But the pros are they are censorship resistant and does not come under anyone's control, not even governments, so it provides anonymity to your trades and funds. But the centralised exchanges offers easy user experience and provide comfortable user interface but it comes with the cost of non anonymity and censorship.
So the both the types of crypto exchanges i.e. centralised and decentralised exchanges have their own pros and cons, choose the best suitable for your purposes.
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