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Centralized vs Decentralized Exchanges: Which Is Better?
With the recent FTX scandal, it’s become a talking point once again: should you keep your coins on a centralized exchange? At first glance, it doesn’t seem harmful. You have easy access to your coins and can trade them whenever you feel like it, you don’t have to worry about losing the keys to your wallet, and you can withdraw to FIAT currency whenever you feel like it.
But the old adage has been proven once again. Not your keys, not your crypto. If a centralized exchange goes bankrupt, your coins are forfeited. In fact, they were never truly yours to begin with.
With that in mind, let’s look at centralized exchanges vs decentralized exchanges. There are pros and cons to both, but if you’re focused on security, safety, and true ownership, then there is only one real choice.
What is a Centralized Exchange?
A centralized exchange, otherwise known as a CEX, is an exchange platform which allows you to buy, sell and trade digital assets. You can send FIAT currency directly from your bank to a centralized exchange and then swap it for the asset of your choice. However, if you leave your coins on centralized exchanges, you never truly own them.
The CEX owns the private keys to your coins and can therefore move them without your consent. If there is a security breach, a malicious actor can access your coins (and everybody else’s stored on the exchange) and remove them without your knowledge. If the exchange goes bankrupt, as with SBF’s FTX, they won’t have the liquidity available for you to withdraw your coins. This is because not all centralized exchanges are run by competent individuals. You have to trust that the organization in charge is actually protecting your money and the CEX’s liquidity, rather than gambling it away or downright stealing it. And it’s been proven time and time again that face value can be deceiving.
Some centralized crypto exchanges seem more secure than others. Binance for one has been around for a while and has earned its place as the biggest centralized exchange by volume. It has an emergency SAFU fund with over $1 billion inside. This is for compensation for potential hacks and other disasters. However, even Binance may not be as trustworthy as you yourself. You still have to rely on them to maintain their security over time.
It’s also worth mentioning that many considered FTX to be a safe and secure centralized crypto exchange, but it turns out they were actually siphoning user funds to their sister company, Alameda. When people tried to withdraw their money, it simply wasn’t there to withdraw.
What are the benefits of using a centralized exchange?
Using a centralized exchange does come with some benefits. It’s user-friendly, usually has an intuitive UI, and allows you to buy almost any coin from any chain without compatibility issues. This is because the centralized exchange owns your assets and can easily move them around behind the scenes. They’re tied to your account rather than your crypto wallet.
Examples of centralized exchanges
Pros of centralized exchanges
- User-friendly interface and intuitive design
- Large choice of digital assets to choose from
- Simple FIAT on-ramp
Cons of centralized exchanges
- Vulnerable to hacks, cybersecurity threats, and security breaches
- Charges service fees
- Controlled by a centralized authority that can be corrupted, censored or closed down
What is a Decentralized Exchange?
The alternative? Decentralized finance (DeFi), which allows you to automatically transfer assets in a peer-to-peer manner. This groundbreaking technology means you can actually own your own assets. No longer is a middleman needed to help (or hinder) you when transferring funds. What the internet did for information, Bitcoin and DeFi are doing for finance.
So, what is a decentralized exchange (DEX)? Similarly to centralized exchanges, a DEX is an exchange platform which allows you to buy, sell and trade assets. The difference? You own your assets. You own your keys. You own your crypto.
You can access a decentralized exchange by using your crypto wallet directly – read our guide to the best crypto wallets in 2023 and beyond. This means the decentralized exchange never has access to your coins. You own your private keys at all times. There are no centralized authorities controlling a decentralized exchange; rather, there is usually some form of decentralized autonomous organization (DAO) in which you can participate. This decentralized form of governance is a gamechanger for big organizations, potentially including governments in the future.
There are also downsides to using decentralized exchanges. While you don’t have to trust a company or an organization, if you want to participate in yield farming or liquidity mining, you will have to trust code. Sometimes developers can make mistakes, and sometimes eagle-eyed hackers are watching. This has led to countless crypto hacks, resulting in the theft of billions of dollars. The hacker can never access your personal wallet (unless you expose your private keys). However, they can access the funds locked within smart contracts if there is a flaw in the code.
If, on the other hand, you are just using decentralized exchanges for trading Bitcoin and other crypto assets, you are in much safer territory. Always check that the decentralized exchanges you use have been audited, preferably by more than one independent auditor. This is especially the case for lesser-known and smaller decentralized exchanges.
What are the benefits of using a decentralized exchange?
By using a decentralized exchange, you are inherently leveraging the advantages of decentralization. You are operating in a P2P network which cannot be shut down or censored. You own your cash just as if it were in your pocket. You no longer need to funnel money through a middleman to transact with other people. You can use a decentralized exchange’s automated market maker to swap your coins directly with a liquidity pool. This also creates an opportunity for arbitrage trading.
Examples of decentralized exchanges
- Glide Finance
- Curve Finance
- 1inch Exchange
Pros of decentralized exchanges
- Private and anonymous (no sign-up needed)
- Can exchange assets directly from the safety of your wallet
- Transaction fees are redistributed to liquidity providers rather than a centralized entity
Cons of decentralized exchanges
- Trading in FIAT is generally unavailable
- Liquidity providers may encounter impermanent loss
- Liquidity is generally lower than centralized exchanges, making it more difficult to execute large orders
- Changes to the system can be slower due to the decentralized nature of decision making
- Often only compatible with certain blockchains (Uniswap is only for ERC20 tokens, for example)
- Crypto asset diversity: any coin can be listed on a DEX, including scams
CEX vs DEX: Which Is Better?
So which one do you trust more? Centralized exchanges are notoriously easy to use, especially for newcomers who need a FIAT on-ramp. But decentralized exchanges take away the need to trust corporations with your crypto assets. Instead, you can trust yourself and your funds will never leave your wallet.
For active crypto trading, leaving a small amount of your crypto assets on a centralized exchange allows you to take advantage of sudden price swings, especially if you’re trading something that isn’t available on your DEX of choice. However, for security and long-term holding, decentralized crypto exchanges make trading safe.
While a decentralized crypto exchange may not be the best choice for a complete newcomer, it is definitely the better choice for security. Simply put, with centralized exchanges, you are leaving your crypto in the hands of others. This is no different to traditional finance and banking. With decentralized exchanges, you own your private keys at all times.
As the FTX bankruptcy has confirmed, not all centralized exchanges – even the ones that seem safe, secure and popular – are as safe as they seem.
Centralized and decentralized exchanges both have their benefits and drawbacks. It all depends on what matters most to you. With a DEX, and decentralized apps in general, you yourself safely store your data and crypto. Centralized exchanges are easier to use for beginners but are becoming less and less trustworthy as time goes by.
It’s true that cryptocurrency exchanges will evolve over the following years, improving security and UI, but it would be incredibly difficult for centralized crypto exchanges to ever compete with the security of your own wallet. And this is the bottom line. In time, decentralized crypto exchanges may be able to offer all the perks of a centralized exchange, but centralized crypto exchanges will never be able to offer the perks of a decentralized crypto exchange.
Decentralized exchanges are at the heart of the decentralized web. Whether we’re looking at web 3.0, the metaverse, or whatever other name you want to call the decentralized internet of the future, the time of CEX dominance is almost up.
Glide Finance – Trade Native Elastos Assets Seamlessly
The native DEX in the Elastos ecosystem is Glide Finance. It has been audited by Paladin Blockchain Security. You can provide liquidity, stake your GLIDE and even use your Phantz non-fungible tokens to get bonuses in APR. Access the DEX, and many other decentralized apps, directly from your Essentials Super-Wallet.