Centralized and Decentralized Crypto Exchanges Explained
The number of cryptocurrencies and trading activities has grown over the last few years. As a result, these transactions require the assistance of cryptocurrency exchanges, like the Centralized Exchange (CEX) and Decentralized Exchange (DEX).
A cryptocurrency exchange is a platform that enables crypto enthusiasts to trade digital assets instantly. Security, cost, control, and other factors differ significantly between centralized and decentralized exchanges.
Therefore, before choosing one, users should carefully consider all their options. Read on to understand which one works best for your trading needs.
Centralized Exchange (CEX): What Is It?
A centralized crypto exchange is a platform that depends on an intermediary to manage, monitor and verify all transactions in a network. These transactions can be trades of cryptocurrencies for fiat currencies such as the US dollar or digital tokens and coins.
Centralized exchanges function as a middleman or brokers that safeguards and keeps your digital currencies safe. The middleman is in charge of maintaining a ledger, carrying out transactions, protecting user data, and other duties associated with running a financial system.
Before initiating a transaction on a centralized exchange, traders must undergo the Know Your Customer (KYC) process and provide some personal information to authenticate the transaction.
The KYC process also applies to organizations and businesses before utilizing the platform and tools. Individuals and organizations that are verified by the centralized exchange have a greater chance of receiving higher withdrawal limits and customer support should they experience technical difficulties.
Decentralized Exchange (DEX): What Is It?
On the other hand, a decentralized crypto exchange (like the Riverex platform) is a non-centralized platform that enables users to trade digital currencies without using a single intermediary.
They utilize an interconnected system of users and their devices rather than depending on any bank, business, or centralized authority. Therefore, users need not deposit their funds to a third-party account to initiate a transaction.
The transaction occurs through a smart contract to automatically validate, execute, and complete transactions. Trading using smart contracts is safer as long as they are created correctly, at which point there can be no security breach.
A decentralized exchange generally is based on blockchain technology, making peer-to-peer trading possible. As a result, traders do not need authorization from an intermediary to trade their digital assets.
Centralized Exchange (CEX) and Decentralized Exchange (DEX) Compared
A short comparison between centralized and decentralized cryptocurrency exchanges is given below:
| Specification | Centralized Exchange | Decentralized Exchange |
| Features | Trading functionalities like margin trading, portfolio management tools, and refined order types | Restricted number of order types, do not have access to margin trading |
| Crypto Asset Range | Crypto assets on CEX must follow thorough criteria to be listed | Anything can be listed on a DEX, which gives you more chances to trade new and in-demand assets |
| Authority | The exchange has the possession of your currencies | You have complete control of your own assets |
| Fees | Higher transaction fees | Lower transaction fees |
| Liquidity | Higher fluctuations | Uses a mechanism called Automated Market Makers (AMMs) to balance the liquidity levels of the exchange |
| Security | – High risks of project hoaxes that might cause huge loss for traders – Holds your personal wallet, you can request the exchange to reset the password for you | – Little to no room of hacking, as a person would have to manipulate every user – You own your wallet, if you forget the seed phrase, you won’t be able to change your password |
| Privacy | Have a thorough Know Your Customer (KYC) process | Transactions are done in total anonymity |
| Usability | By paying additional fees, traders can ask exchange middlemen to carry out transactions on their behalf so they can access their money through ATMs or debit cards | Users to have to go through all the processes in their financial system |
| Regulations | Can be prohibited in certain countries if the licenses do not abide by government regulations | Governments and regulators do not influence DEX platforms |
Conclusion
A decentralized exchange is a breakthrough idea that will potentially become the industry standard in the future, even though a centralized exchange is more user-friendly and possibly safer.
Join the increasing number of people who are engaging in decentralized exchanges for cryptocurrencies. Experience a diverse crypto engagement with a decentralized exchange through the Riverex platform.
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