Centralized vs Decentralized Cryptocurrency Exchanges — Explained Simply!5th May 2019
Centralized vs Decentralized Cryptocurrency Exchanges — Explained Simply!
The term “Cryptocurrency” is ruling the world in recent years. Cryptocurrencies are of primary concern since of secure, trustful one to deal since the world is moving towards that! Moreover, the currencies are digital they cannot be counterfeited and this is why investors are panning towards crypto exchange services!
With the surge in Cryptocurrencies, traders’ demand for Cryptocurrency Exchanges to perform trading. Crypto Exchanges play a vital role in the development of the blockchain industry.
To put in simple words, a Cryptocurrency Exchange allows the investors to trade, buy or sell cryptocurrencies instantly. Usually, a crypto exchange supports more than 20 currencies to perform well-established trading. When it comes to exchange, people look out for crypto holdings to reap high-end dividends for their business. Therefore, they prefer exchanges which offer great functionalities with feature-packed solutions.
According to DataLight, a crypto analytics website published a report which unveiled that the United States has recorded the highest number of visits on Cryptocurrency exchanges. In accordance with the report, it has recorded 22 million monthly visits leading to 100 cryptocurrency exchanges.
Centralized vs Decentralized Cryptocurrency Exchanges:
With such a raise, these exchanges are the next hot talk of the town!
A centralized exchange operates similar to the banks today:
- There comes an owner.
- They are safe.
- They follow rules and regulations.
Although Centralized exchanges are in existence, the concept of Decentralized Exchanges is in circulation everywhere!
Added, the war against Centralized Exchange has already begun! Wondering how?
You would have probably heard of Proof of Keys concept which was given by the famous bitcoin advisor, Trace Mayer. He suggests that every bitcoin owner who has stored his BTC on a centralized exchange should transfer to its own wallet.
As you all know, coins which are stored by a third-party service and not yours. This could raise questions with security!
This is what exactly happened with HitBTC, which is a centralized exchange with a trading volume of around 40,000 BTC. When trying to withdraw their BTC, some traders have got a message, “Withdrawals are temporarily disabled for this account”.
Added, you need to know the risks associated with the centralized exchange:
- They can be hacked easily through which funds could be lost.
- The entire exchange can disappear tonight.
Now you would understand the real problems with Centralized Exchanges. However, to make Proof of Keys outmoded and you are the true owner of your assets, the decentralized crypto exchange came as a godsend strategy!
This is because:
- Enhanced Privacy due to no registration requirements or KYC process.
- No deposit or withdrawal is required. All the transactions happened between peer to peer is handled by programmatically secure smart contracts.
- No single point of failure, control or regulation.
Before a couple of years, Decentralized Cryptocurrency Exchange was in trouble and people were losing funds even with making small mistakes. But nowadays, this has been the most intuitive platform.
If you are still not sure of what is decentralized exchange, this is the exchange which allows the users to control their crypto funds. Added, this exchange does not have third-party setup!
To resolve all the issues associated with a centralized platform, peer to peer exchange came into existence. This means that users can trade with other users and the cryptocurrencies will be transferred from each other wallets other than from wallets in the cryptocurrency exchange.
Added, to make sure fraudulent activities don’t happen, decentralized asset exchange offer escrow services where each party would deposit their funds and both parties would get their funds!
How does a Decentralized Exchange work?
A Decentralised exchange works as below:
- A token owner places the order: In order to exchange his/her assets with another asset available on DEX. The token owner specifies the number of units, they have to sell, the cost of the token, and until which time bidding for their assets is allowed.
- Once the selling order is set, other users can submit bids by signaling a buy order.
- Once the time is set by seller expires, all the bids are reviewed and executed by both the parties.
While seeing from outside, as a user placing an order:
- You are using your wallet address to sign in to blockchain decentralized exchange.
- You can submit a buy or sell request.
- The smart contracts get executed and transfer of assets is done.
- Disconnect it.
With this popularity, a large number of startups are interested in knowing how to build a decentralized exchange. The thing is it could possibly be the reason through which dividends can be raised.
Are Decentralized Bitcoin Exchanges popular yet?
Generally, the answer is no. If you look at Centralized Exchanges such as Binance, Coinbase, Bittrex, they already have a percentage of around 99% of total cryptocurrency transaction volume.
The major reason is, decentralized exchange development wasn’t existing those days! Moreover, this was the time most of the crypto investors joined the market!
Coming to the present, are they doing well for now?
If you are a newbie this can be a perfect time where you can read a hell lot of increasing discussions on how to create a decentralized exchange and much more! Moreover, these are discussed on public and social forums such as Twitter, Reddit, Quora, etc.
If you go with Google Trend, you can find decentralized exchange software as a priority. Yet another interesting news which is finding its position on top news is Binance launching DEX.
With the desirable features when compared with centralized exchange vs decentralized exchange, decentralised remains to be the top priority!
At the present moment, investors can start exchanging Binance coin against MITH, which is the latest IEO held on Binance launchpad.
To get started users need to:
- Provide the Username, Email address, and ID verification.
- Users have to create an address on Binance chain, which is the Blockchain network created and launched by Binance a few days ago!
This Binance Decentralized Exchange has been the popular one which could eventually take away the authority obtained through illegal modes!
Moreover, people are marching towards this strategy which can bring forth potential profits to the business!
Yet another news is with Stellar Decentralized Exchange. However, this is not as popular as Binance!
One of the reasons behind this can be the recent trade down percentage! Stellar has traded down 2.8% this week! Anyhow, on May 1st it recorded around 2.8% up against the US dollar which is undeniably true!
Why build a Decentralized Exchange?
By taking all these criteria into account, you need to take into account the following strategies as well:
Trading fees are the area where most of the crypto traders pay attention to. In the case of traditional platforms, customers have to pay a per trade fee which is different from crypto trading platforms!
Centralised exchanges usually charge a % of the fee for every transaction, while in a white-label decentralized exchange it operates similar to the per trade fee!
Therefore when a transaction is ready to be placed on DEX, you need to pay a gas fee through which your trade will be confirmed through Blockchain. Gas cost would usually range between $0.05-$1.
Decentralized exchange script usually doesn’t have a central authority involved. Therefore, no requirement will be imposed on them. One can sign in and start trading without any identity verification.
Additionally, Anonymity allows the user to access the tools which are not available otherwise.
If you are not clear, let me explain with the example. BitMEX is one of the crypto exchange, however, doesn’t allow the traders from the US to leverage the services!
On the flip side, dYdX, the largest decentralized exchange allows the user to avail services!
Yet another feature of decentralized exchange bitcoin is the ownership over his/her assets. In a centralized exchange, the ownership of the coins is held by the exchange completely. However, by holding on the exchange to the keys can lead to a faster execution since the user doesn’t need to provide access. But this can be the reason for the crypto theft!
You have a real example of this. In 2018, $713 million was stolen with the most of them coming from Coincheck Exchange hack.
In a Decentralised Exchange, you are completely free from these risks!
The downfall of centralized exchanges is mainly with Liquidity factor. Without Liquidity, price discovery is hard to achieve!
The COO at Zeus. Exchange, Catherine Yushina highlights the importance of Liquidity in crypto trading.
“Liquidity in crypto can be provided by crypto assets backed by traditional assets, aka by bridging crypto and fiat markets. Higher liquidity would lead to faster transactions, more stable prices and therefore more market participants. This would boost the general public adoption of blockchain technology and crypto instruments and lead to “maturity” of the industry. While there are discussions around Crypto VS. Fiat worlds, crypto is more of an extension, the next evolution step for the financial market as a whole”.
Pick which fits in
As the world of crypto takes time to mature and develop into the featured ecosystem, cryptocurrencies have to take a center stage! In recent days, coins and tokens are the forms involved in investment speculation, which gives us access to the trading platforms that have a larger shape in the industry! There are a plethora of startups who are moving with either of the exchange depending on their roadway!
Choosing either the best decentralized exchange or centralized exchange is going to completely depend on you and your destination of success! If you are with a decentralised exchange, a higher level of responsibility is always needed to safeguard your own assets!
Decentralization brings us the new world of trustlessness, but you must trust yourself to be responsible!
Centralized vs Decentralized Cryptocurrency Exchanges — Explained Simply! was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.