What Are The Differences Between Centralized and Decentralized Exchanges?
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Table Of Contents:
What Are Decentralized Exchanges (DEX’s)?
What Are Centralized Exchanges (CEX’s)?
What Is The Difference Between Centralized Exchanges and Decentralized Exchanges?
What Is The Importance Of The Peer-To-Peer Decentralized Marketplace?
What Are Decentralized Exchanges (DEXs)?
Decentralized Exchanges (DEXs) , are in essence an exchange where cryptocurrency investors can trade, buy, and sell cryptocurrencies through a peer-to-peer marketplace (defined as individuals selling cryptocurrencies or trading cryptocurrencies to other individuals on the exchange) without having to compromise their financial management and send over authority to a “trusted” third party or intermediary.
The transactions from cryptocurrency investors to other cryptocurrency investors are executed by smart contracts ; lines of code that execute agreements individually without both parties having to sign a contractual clause, to verify the transaction goes through and both parties trade, buy, or sell for the amount they desired and agreed upon.
This peer-to-peer network removes the necessity of a central authority managing all these assets by allowing individuals to directly sell, trade, or buy cryptocurrencies to other individuals on the marketplace. It allows the network to connect buyers and sellers of cryptocurrencies without relinquishing their control over their wallets and funds.
What Are Centralized Exchanges (CEXs)?
Centralized Exchanges (CEXs) , are organizations that manage cryptocurrencies assets acting as an intermediary through mechanisms where they match up buy orders with sell orders by managing both parties’ assets and financials on the exchange.
Centralized Exchanges are the biggest mechanism in which individuals purchase and trade cryptocurrencies, dominating the industry compared to Decentralized Exchanges, accounting for 95% of all cryptocurrency trading on exchanges.
Most exchanges require a KYC (Know Your Customer) Verification Process to know you are a verifiable person because they do comply more closely to financial regulations than its counterpart.
Binance Is One Of The World’s Largest Centralized Exchanges
What Is The Difference Between Centralized Exchanges and Decentralized Exchanges?
They key differentiations between Centralized Exchanges and Decentralized Exchanges are as follows:
- Intermediaries and Central Authorities
Centralized Exchanges require some form of central authority to initiate and complete transactions between individual cryptocurrency traders. The intermediary verifies both individuals can initiate and complete the transaction through their centralized system as they essentially have your assets locked in on the exchange until you initiate a transaction. Users on these exchanges require the central authority to verify the transaction on their terms rather rather than compliance between the initial two parties.
Decentralized Exchanges aim to remove the central authorities completely by contractually obligating both parties to self-executable non-alterable and eternally stored lines of code that ensure the process is completed without having a “trusted” third party or central authority to initiate it.
- Anonymity and Financial Control
Centralized Exchanges regularly require some form of Know-Your-Customer protocol to comply with financial regulations since they act in a fashion more in comparison to a stock exchange. This means that you will have to verify and release your identity to the Centralized Exchange and/or other third parties they collaborate with. There is almost no exceptions to avoiding the verification of your actual identity. They also require you relinquish your assets of fiat currencies and/or cryptocurrencies from your bank accounts or cryptocurrency wallets before initiating any trades on the platform.
Decentralized Exchanges aim to enable and allow the vision of empowering individuals to retain control of their privacy whilst also obtaining financial identity and control over their own assets. Because the process of trading between investors is an automatic process initiated and completed through lines of code rather than a central authority. Because of this mechanism, it allows investors to still retain control of their assets and keep them stored in their wallets while also allowing users to initiate transactions with however much privacy they each individuals aims to obtain.
- Fees and Transaction Speeds
Decentralized Exchanges and Centralized Exchanges differ in their goals to create more efficient transactions in terms of fees and transaction speeds. Decentralized Exchanges aim to reduce fees and increase speeds of transactions by removing the intermediary verifying the process and instead replace it with self-executing unalterable lines of code that will verify and process the transaction. By removing the intermediary processing the transaction and consuming fees, traders will be able to sell directly to their peers without needing a central authority to act as an intermediary.
- Aligning With The Vision Of Cryptocurrencies
There has been an ever-growing and concerning debate on the possible fallacies cryptocurrency investors engage in when interacting on Centralized Exchanges . One of the largest concerns is the misalignments of values between these exchanges and cryptocurrencies. Cryptocurrencies are aimed to remove a central authority all together by allowing each individual the ability to trade with any of their peers without relinquishing control of their assets with a trusted intermediary of exchange. By using Centralized Exchanges, it is essentially defeats the purpose of using cryptocurrencies as you relinquish your privacy and a sizable portion of your control over your financials.
For example; Coinbase , one of the largest Centralized Exchanges ever created, has added a disclosure in their most recent report allowing the company to seize the assets of their customers in the event they require financing bankrupting proceedings. The ability for a Centralized Exchange to retain such an immense power over each trader is quite daunting to say the least. Even though the CEO of Coinbase; Brian Armstrong, stated on Twitter that user’s funds are safe, these disclosures and relinquishment of an individual’s control over their assets is the exact issues that many around the world face with the legacy financial system.
What Is The Importance Of The Peer-To-Peer Decentralized Marketplace?
The significance of these exchanges is the abandonment of central authorities and trusted third parties to manage and control customer’s assets. Cryptocurrencies are by default envisioned to function in a decentralized peer-to-peer manner. The creator of Bitcoin; Satoshi Nakamoto, described Bitcoin in the white paper as a “Peer-to-Peer Electronic Cash System,” defining it as a decentralized network removing the once necessary central authority to initiate transactions between individuals.
Because you can initiate these transactions without a central authority in your wallets, you still have to find some system or marketplace to actually purchase cryptocurrencies to put in your wallet (otherwise the wallet is useless if there is no systemin place to purchase and/or obtain what it stores). Although you can earn BTC and ETH through Proof-Of-Work and you can earn Cardano through Proof-Of-Stake , there is no real place to actually convert fiat currencies to cryptocurrencies besides Decentralized Exchanges.
Because of this fact, the vision to allow the community to buy and sell with each other and removing the central authority that was once a requirement to initiate, process, and verify the transaction, directly coincides with the goals many cryptocurrencies aim to reach.
Cryptocurrencies would not be able to thrive and the community could not engage these ecosystems without Decentralized Exchanges; however, the purpose of cryptocurrencies would be defeated spontaneously if exchanges still maintained the control over your finances through an intermediary.
Cryptocurrencies are designed to be decentralized and peer-to-peer, and that is why Decentralized Exchanges are the only possibility for utilizing a true marketplace and enabling the world to engage and buy into the cryptocurrencies they desire from their fellow peers.
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