Centralized vs. Decentralized Exchanges: What’s the Difference, and What’s Best for You?
Today you can use a cryptocurrency exchange to trade crypto with other crypto, trade fiat currencies for crypto, or cash out crypto.
Trading crypto involves multiple technical elements that occur in the background of every transaction. A routing Bitcoin trade, for example, requires six confirmations before a transaction is deemed settled.
Although centralized exchanges have existed for years and had time to mature, decentralized exchanges also are emerging with a different approach to trading. So, what’s the difference and which one is right for you?
Centralized exchanges act as a trusted intermediary to facilitate trades and store tokens securely. The exchange maintains customer accounts, facilitates transactions and provides other services to help users. Centralized exchanges may also review new currencies and vet them before including them in the platform.
For most traders, this is a more convenient model than managing transactions and balances themselves as they would with a decentralized exchange. Centralized exchanges have teams of cybersecurity experts to secure their virtual vaults, offering a level of security that individual investors generally can’t match.
Centralized exchanges also have the added benefit of hosting mobile apps for their users. These exchanges typically have mature, easy-to-use interfaces with additional resources for traders looking to research cryptocurrencies, find trading partners, or get started on the platform.
Decentralized exchanges (also commonly known as DEX) operate without that central authority. Instead, they facilitate peer-to-peer trading. Crypto assets are not held in escrow and users retain full custody of their crypto, which remains distributed throughout the crypto network. On balance, this makes them a smaller target for hackers, which may reduce theft. But when attacks do occur, traders are on their own.
Transactions on a decentralized exchange are completed through smart contracts and atomic swaps. This method of trading is secure, but it involves interactions among multiple chains and some lag time while transactions are mined. Throughout this process users may incur additional fees and experience transaction delays. Thus, traders on this type of exchange should have a thorough understanding of how wallets and order books work.
Information on distributed exchanges is public, which introduces complexities. In addition to potential security issues around exposing data, the visibility into transactions and their longer turnaround time can lead to front-running. Front-running occurs when a third-party monitors a trader’s transaction and jumps in with their own trade to secure an optimal price, adversely impacting the price of the initial trade. To add additional uncertainty, prices can also fluctuate on their own while a DEX-based transaction settles, potentially altering the value of the initial trade.
Which exchange is right for you?
When selecting an exchange, keep in mind all these factors that affect your user experience, including what kinds of trades are offered, the volume and velocity of trades, and the security measures provided by the exchange.
Centralized exchanges are far more prevalent and have had years to accumulate users, trust, liquidity, and cybersecurity expertise, along with developing a more robust and feature-rich user interface. For these reasons, users who are looking to trade crypto most often choose a centralized exchange.
To experience a centralized exchange in action, start today with Bittrex. Create your account to trade your way.