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The Difference Between Centralized and Decentralized Crypto Exchanges Explained

The cryptocurrency market has been in full blaze lately with 20x to 200x returns at the fore-front for INR to BTC or INR to ETH (Ethereum) pairs. With a lot of optimism during the CoronaVirus period about cryptocurrency trading and the explosion of DeFi projects, BTC and ALTCoins are grand dominators in the investment market. Nevertheless, scams have severely tarnished the images of top cryptocurrency exchanges like SushiSwap’s (Vampire Attack), Binance, BitFinex, BitMax raising the panic button for investors. If you want to ride strong in this crypto season, it will be a great idea to pick the right exchange for trading. In this article, you will get to know about centralized and decentralized exchange key differences and which one should be best for your trading goals.

Top Aspects That Differentiate Between a Centralized and Decentralized Exchange


While trading, the investors or traders want to gain full control of their funds in the form of INR To BTC or INR to ETH or other ALTCoins. But such is not the case when you are trading at the centralized exchanges. These exchanges have full control of your funds. But, when you talk about DEX or Decentralized Exchange, the control belongs to the user since the transactions are governed by smart-contracts that follow an escrow and atomic swaps completely ensuring that no other party is in full control of the other party’s funds.


These days a lot of hacks have occurred at the centralized exchange since one single party manages and controls the funds of everyone who is trading at their exchange. As a result, hackers need to hack just one single private key. Such is not the case when you have to deal with decentralized exchanges as there is no one single party managing all the funds of the traders. Even if the entire exchange collapses, still the control of funds lies in the hands of the traders.


It is often the one that enters first getting maximum attention. This is true in reality for everything and even for the battle between CEX & DEX. Since Centralized Exchanges(CEX) or CEXes have been the first entrant in the cryptocurrency market, they are more popular among investors. On centralized exchanges, you get the advantage of getting more liquidity and infrastructural security. On the contrary, DEX or decentralized exchanges will have to wait for a while to pick up the pace. Since they have recently entered the market and big names like Binance launching their own could have a significant impact on the reputation building of these exchanges.


Centralized exchanges have to be managed by a third party and the fees vary for transactions depending on the liquidity at the exchange. If some exchanges provide higher value in terms of futuristic interface, they will charge more for that. But decentralized exchanges are completely peer-to-peer resulting in smart-contracts performing order booking and other functions. As a result, there are either zero trading fees or at times, for processing the transaction, some amount has to be paid to the miners for validation which is very less in comparison to a centralized exchange.


Centralized exchanges are feature-rich since you can do margin-trading, portfolio management, and exploit advance order types of higher profits. Such advantages are not present at decentralized exchanges, especially, the lack of availability of margin trading.


Centralized exchanges are easily regulated since they have to do a lot of paper-work for starting an exchange for trading. The authorities regulate the operations by compelling the exchange to abide by the rules and regulations set up by them. On the contrary, a decentralized exchange is completely built on the blockchain ecosystem and it is not regulated in any way. With that said, even if there is a complete crypto ban in an economy, the decentralized exchange can still function, which is a great advantage given by the democratic nature of the DEXes.


Liquidity is a concern at DEX or decentralized exchange since due to heavy congestion in the Ethereum Network, the order matching takes a considerable amount of time. That’s where centralized exchange completely outsmarts the decentralized exchanges because multiple users are demanding the portfolio and marker makers further add-in to the liquidity making these exchanges vast and scalable.


On a centralized exchange, an order can be processed in 10 millionths of a second; whereas, a decentralized exchange nearly takes 15 seconds to process the same. The 15-second can further scale to even a minute time due to heavy traffic on the Ethereum Network. This could make trading a lot of hassle when you want faster cycles to be completed as per the changing cryptocurrency prices every second.


It entirely depends on what you want from the crypto business plan that both these exchanges have. Some grey and white areas will always be there no matter how innovative or futuristic is a new technology. There is bound to be a disequilibrium considering the pros and cons they bring with themselves. The only thing that can make you rational is to balance them in a proper way. Decentralized exchanges are in their evolutionary phase since they are very new. It will take a lot of time and improvement for the decentralized exchanges to outsmart centralized exchanges for volume trading and other features. It is up to your preference what do you wish to have and the patience level you have built for trading.

About Author Rahul Kohali :

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Article Added on Friday, October 30, 2020
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