A number of cryptocurrencies with different values are available in the crypto market today. Users are trading the currencies they have with the more popular ones. The trading of currencies happens in exchanges.
Decentralized Vs Centralized Exchanges
A user can exchange one currency for another in exchange. The exchanges can be a body, an organization or simply a technology. Exchanges are of two types, Centralized and Decentralized. In this article, we are talking about the comparison between them.
What is the Centralized Exchange (CCE)?
Centralized exchanges are the same as that of traditional stock exchanges. These types of exchanges are owned and operated by companies that have total control over all transactions. The users deposit their currencies to the exchanges and the exchanges are responsible for all the transactions. In a centralized exchange, the mechanism used for the transaction is decided by the central body.
What is Decentralized Exchange (DCE)?
A decentralized exchange is not controlled by a company or any intermediaries. This type of exchange uses the blockchain technology for transactions. The users have complete control over their funds and transactions.
The greatest aim of a decentralized exchange is to reduce the risk of hacking and thus protect the funds of the users. The decentralized exchange allows only the transaction of one cryptocurrency in exchange for others.
Comparison between Centralized and Decentralized Exchanges.
- Trade Volume: The centralized exchange has a higher trade volume compared to its decentralized counterparts. About 99% of trade happens in CCE. The lower trade volume in DCE is due to its difficult usage. DCEs are not able to handle a large number of transactions simultaneously.
- Mode of Payments: Centralised exchanges allow users to exchange their cryptocurrencies for physical currencies and vice-versa. They also allow direct bank payments or credit card payments for their users. Decentralized exchanges only allow the exchange of cryptocurrencies and they also accept payments in the form of cryptocurrencies.
- Security: Centralised exchanges are prone to attacks from hackers. This is due to many reasons like software faults or lack of proper management. Many exchanges like MtGox, Coincheck, etc. were hacked and currencies worth million were stolen. DCEs are less prone to attacks because of their distributed nature of nodes.
- Government Policies: CCEs are physical exchanges that are situated in a particular county, due to this factor they are bound to follow the regulations of the government. Because of the worldwide distribution of DCEs, government intervention is not possible.
- Privacy: CCEs provide less privacy because the user needs to provide a large amount of personal information. DCEs provide a high level of privacy. All the transactions are anonymous.
- Insurance of Account: In CCEs, all the user accounts are insured and if something wrong happens, the user will get his money back. Whereas DCEs are not insured.
- Transparency: All the details including office locations, servers, etc. of CCEs are known to the users. DCEs do not have any formal location do that the user has less knowledge.
From the above comparison, it is clear that both the exchange types have their own pros and cons. Even though the DCEs provide better security to the users, the CCEs are more user-friendly and have more popularity in this world. But if the Decentralized Exchanges improves its functionality in the future, it may replace its centralized counterpart.