More than 1600+ cryptocurrencies are operating in the digital space, which traders can exchange on over 200 exchanges (and growing), as per the Coinmarketcap report. Each exchange has different features from the other. However, at their core, we categorize them into two categories; centralized exchanges and decentralized cryptocurrency exchange platform.
Both the platform type have become integral parts of the blockchain ecosystem. Many cryptocurrency enthusiasts think that opting a centralized exchange platform to trade digital assets is a counter-intuitive decision to the decentralization aspect of the blockchain. In that case, centralized exchanges hold a strong position by providing benefits like strengthened security, efficiency, and lower costs.
Centralized exchanges, often known as CEX, are run by regulatory institutions that oversee their daily operations like maintenance, security, growth, and customer satisfaction. The business model of a centralized platform finds many methods similar to a traditional securities exchange, such as charging a trading fee for providing access to the marketplace. Essentially, it operates as a mediating third party that provides a common platform to connect buyers and sellers.
In general, centralized exchanges are preferably a better access point for the newbies in the digital currency space. They may also allow clients to gain benefits of additional services, which are not currently available on decentralized exchanges, like stop losses, lending, and margin trading Several centralized exchanges act as a platform which enables trades in fiat to digital currencies trades. These exchanges are usually regulated and require to comply with their jurisdiction’s know your customer (KYC) and anti-money laundering (AML) requirements. In countries like Canada and the USA, governments have passed laws after 2014 that necessitates digital asset trading businesses to register with regulatory authority like FINTRAC, the federal monetary regulatory authority.
If we have something to criticize, it is that centralized exchanges go against the decentralized aspect of blockchain by, essentially, relieving the power to an intermediary. When we take a close look at the past of blockchain and bitcoin, it reveals numerous incidents where sometimes trusting in a centralized exchange platform for digital asset trading has backfired.
However, now as the industry is growing, they are also becoming more regulated and covered by insurance.
Decentralized Exchanges offer customizability and autonomy
By integrating smart contracts, a decentralized exchange (DEX) can be coded to operate to a certain extent autonomously. The smart contracts in the exchange platform will enable lenders and borrowers to exchange in a peer to peer without involving any third party or intermediary. This removal of friction from the transactions allows them to achieve the decentralized aspect of blockchain technology.
Decentralized exchanges are relatively new in the crypto domain and only share a small portion of the total volume of digital currency trading, although they are gaining significant traction.
The Although transaction exchanges are decentralized, DEXs still have an overseeing centralized authority to maintain the integrity of its operation. A team of cryptocurrency developers is required to develop complex decentralized applications (dApps) to facilitate decentralized trades. DEXs still charge from non-existent to minimal fees for operating on the exchange, although they are not liquid enough when than their centralized counterparts.
One advantage for of DEXs is that tokens from initial coin offerings (ICO), often find their way easily than centralized exchanges. Centralized exchanges require a high degree of technical development before safely integrating a new coin into the exchange, in comparison to DEXs.
DEXs are difficult to operate for new users and require considerable knowledge of technical know-how of using and attracting those who are new to digital currencies. They typically lack some of the features like user-friendly, usability, customer oriented-services, usually found on centralized exchanges, such as margin trading.
Another obstacle for some DEXs is on the path to widespread adoption is that they only allow trading in tokens native to their platform.
A DEX that runs on top of the blockchain platform like Ethereum network, for instance, can only provide Ethereum based tokens in their list of assets that can be traded.
Atomic swaps enable digital currencies to move more readily from one blockchain to the next. They can eventually enable the creation of DEXs that provide a variety of assets exchange beyond the platform itself.
DEXs may also experience less trading volume than many other traditional and centralized exchanges, probably we can say the reason for this is ints average user experience and lack of asset diversification.
To centralize or not to centralize?
When it comes to choosing an exchange type to launch a crypto exchange, so many factors require to be taken into consideration. As there are as many valid arguments for centralization, and many against, the decision to go with either one should be taken after proper research and study of these factors. Exchanges are quite similar to those digital currencies that they trade, each comes with its unique properties, as well as boons and banes.
At the end of the day, it’s up to the individual to decide, like any tool it comes down to personal preference. More often than not people use more than one, a centralized exchange as an on-ramp for fiat, plus a DEX for tokens which have yet to be listed on the larger exchanges.
BIO: We are a blockchain development company based in India. We have expertise in providing innovative cryptocurrency exchange development services, including decentralized asset exchange. Our blockchain based solutions also include smart contract development, fintech application solutions, STO development services, etc.