Differences between centralized and decentralized cryptocurrency exchanges
Decentralization is a system organization paradigm that distributes decision-making power without the participation of a central authority, in other words, each of the participants has the same amount of power, therefore, no one can take full control of the system.
This is precisely one of the most important characteristics of cryptocurrencies where the transfer of value does not require the participation of a trusted intermediary. Uniswap clone This same idea of decentralization has not fully materialized in cryptocurrency exchanges, the vast majority of these online platforms operate under a centralized architecture.
Differences between centralized and decentralized cryptocurrency exchanges
Next, we are going to talk about the most important differences between centralized cryptocurrency exchanges (CCE) and decentralized cryptocurrency exchanges (DEX).
Centralized exchanges
ECCs usually act as the first point of contact that newcomers have with the world of crypto assets. In these platforms there is a central authority that acts as an intermediary between buyers and sellers, and charges certain fees for the services it provides. A CCE is owned and operated by a company that maintains full control over all transactions.Uniswap clone script Users of a CCE do not have access to the private keys of their account wallets. This puts all user trust in the hands of the exchange operators, as transactions can only take place through the mechanisms provided and approved by a central authority.
Its operation is simple from the user’s point of view. If Juan wants to buy cryptocurrencies there are basically two options: Juan goes to the order book and finds an offer that seems attractive to him, he enters the buy order which is matched with a corresponding sell order. In the second option, Juan creates his own purchase order, specifying the terms of the exchange, that is, price and quantity.
Among the most popular CCEs we find Binance, Bitfinex, Bittrex, Coinbase, Kraken, HitBTC, Huobi, Poloniex, YoBit, KuCoin, among others.
decentralized exchanges
Unlike CCEs, DEXs do not require intermediaries to act as a central authority for their operation. Instead of matching buy and sell orders on an order book, DEXs operate by matching the people behind the buy and sell orders. For example, let’s imagine that John wants to buy 2 BTC, instead of his order entering the order book, it is matched with Lorraine’s sell order which is also for 2 BTC. A software that identifies the matching orders facilitates the entire process, making the transaction between Juan and Lorena be carried out without intermediaries, this means that the fees charged for the transactions are very low or simply non-existent.
The user who wishes to open an account in a CCE must comply with strict KYC — Know Your Costumer, in English — and AML — Anti-Money Laundering, in English — processes, which are defined by state regulations that basically have to do with the delivery of personal information that is used for an account validation process. For example, the passport or identity document, a proof of address and, eventually, bank and financial information are requested. In contrast, you can trade anonymously on a DEX — which is not to the liking of regulators — because the submission and approval of personal information is not required to trade.
security considerations
Regarding the security of crypto assets, a CCE becomes the controller of users’ cryptocurrencies, which must be deposited in a custodial wallet of the exchange in order to operate. This takes cryptocurrencies out of their owner’s control, making them susceptible to hacking and theft — which unfortunately happens quite often. Uniswap clone software In contrast, users who operate on a DEX never lose control of their crypto assets, transactions are made between the non-custodial wallets they own.
A DEX works in a distributed manner across a blockchain, with orders and information routed in a peer-to-peer (P2P) protocol. In this way, users trust a network of hundreds of decentralized and independent nodes instead of a single centralized entity controlled by its owners.
Although DEXs have some advantages over ECCs, the former are still not as popular. This means that the volume of transactions that are processed in the DEX is considerably lower than that of the CCE, therefore, liquidity is affected.
Many well-known exchanges operate under the centralized scheme, such as Coinbase, Bittrex, Poloniex, Kraken, Bitfinex, Bitstamp, and Binance, among others. These are platforms where an intermediary, in this case a specific company, intervenes in the relationship between two people who wish to exchange cryptocurrencies .
As the cryptocurrency market grew, the first centralized exchange businesses that emerged began to fulfill functions that brought them closer to the classic safekeeping financial intermediation carried out by banks, but more adapted to the crypto world.
This intermediation includes the conversion of fiduciary money to digital currency , one of its outstanding activities, having to interact with regulated entities in order to operate with the parities between fiduciary money and cryptocurrencies. With the rise of altcoins, progress was made towards crypto peer-to-peer trading.
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