- What is a Cryptocurrency exchange?
- What is a centralized and decentralized exchange?
Trading cryptocurrencies requires an exchange on which these trades can be executed. These exchanges act as the medium through which all the trades are carried out. By the definition, a cryptocurrency exchange is an online marketplace where buying and selling of cryptocurrencies takes place. There are various crypto exchanges throughout the world and each is governed by its own set of rules.
These cryptocurrency exchanges can be categorized into two types namely “Centralized Cryptocurrency Exchange” and “Decentralized Cryptocurrency Exchange”. Let’s deep dive into the basics of the two categories for a better picture.
WHAT ARE CENTRALIZED AND DECENTRALIZED CRYPTOCURRENCY EXCHANGES?
Though both the categories of cryptocurrency exchanges are used to trade cryptocurrencies, there is a basic fundamental difference between them.
A centralized exchange uses a third party middleman to ensure that the transactions on the exchange are properly monitored, executed and secured. These exchanges act similar to the banks in the banking system where the users or the traders can trust these banks for securing their money during the trading transactions. Though the centralized cryptocurrency exchanges are more often used, they are frowned upon by the crypto community as defying the basic concept of decentralization on which the cryptocurrencies are being developed.
A Decentralized cryptocurrency on the other hand does not employ any third party as an intermediary for the execution and securing the trades on the exchange. These exchanges rather create a “trustless” environment by making use of smart contracts and atomic swaps. This makes it possible for these exchanges to execute peer-to-peer transactions without a third party. Though, decentralized exchanges are unable to facilitate the trading of cryptocurrencies using fiat currencies.
Both the exchanges have their merits and demerits. The centralized exchanges on one hand provide the benefits of reliability and user friendliness and on the other hand are susceptible to hacking and have high transaction fees. The decentralized exchanges on one hand provide the benefits of anonymity, security and market manipulation and on the other hand have low liquidity, lacks fiat currency trades and is quite complex to Operate.
Both the categories of the exchanges have certain merits and limitations, and thus the criteria of selection of these exchanges becomes a personal decision and must be taken by a user in accordance with the suitability as per the use case. If a better UI, fiat to crypto trades, reliability is required, a user must choose centralized exchanges for trading. On the other hand if security, anonymity and market manipulation prevention is required. One must make use of decentralized crypto exchanges for trading.
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Disclaimer: The article should not be considered as any financial advice. It is advisable to conduct thorough research before investmenting.
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