Centralized vs Decentralized Crypto Exchanges

Cryptocurrencies become more and more popular, and people all over the world desire to get some. While Bitcoin remains the top project, there are over 2,000 altcoins available via more than 200 exchanges.
Crypto enthusiasts can buy some coins through centralized or decentralized exchanges. The first group (CEXs) includes traditional websites with central servers that store their customers’ money. The second one (DEXs) stands for innovative marketplaces which allow trading directly among users, without making deposits on the website. Both types have their pros and cons, and the battle between them is one of the most significant in the crypto world nowadays.
Let’s figure out the main differences between centralized and decentralized exchange services and try to predict how things will unravel in terms of their competition.

Basic definitions

Both types of exchanges have the same goal, as they help traders to buy or sell cryptocurrency. However, CEXs and DEXs feature completely different approaches.
Centralized exchanges work like traditional fiat marketplaces or brokerages. They are operated by a central authority which controls everything. CEXs store users’ money with private keys. What is important is that traders don’t have access to these keys, which means that they don’t actually own their funds until they keep them on the exchange. That is why customers must trust the services and rely on its protection. Examples of well-known CEXs: Coinbase, Kraken, Binance, Bitfinex, Huobi.
Decentralized exchanges are different. By a principle of operation, they are pretty similar to cryptocurrencies – they aren’t controlled by any authority and don’t have any company behind them. DEXs function like peer-to-peer networks and utilize blockchain for transactions: users don’t have to transfer their money to exchanges’ storages, instead, they trade using their own private wallets. Examples of DEXs: Waves, Bancor, EtherDelta, Kyber Network, BitShares.

CEXs vs DEXs

To find out which approach is better for the community, let’s check the following criteria: trading features, functionality, safety, privacy, and popularity.

1. Trading features

It’s a complex section which includes a few subcategories: volume, liquidity, speed, fiat acceptance, and payment methods.

- Volume. CEXs feature way higher trading volumes – researchers state that they cover 99% of all deals.
- Liquidity. CEXs outperform their decentralized rivals in terms of liquidity. Centralized marketplaces have bigger reserves, so they can supply a lot of trading orders.
- Speed. Traditional platforms feature nearly instant transactions because they are performed inside the system. Decentralized marketplaces have to record and verify deals on the blockchain level – this takes more time.
- Fiat acceptance. Some CEXs like Kraken, Gemini, and CEX.IO allow trading fiat/crypto pairs like USD/BTC or EUR/ETH. DEXs are crypto-only platforms which can’t process fiat transactions.
- Payment methods. While centralized crypto/fiat exchanges allow customers to deposit money using bank cards and wire transfers, decentralized ones are limited to crypto wallets only.

2. Functionality

It’s obvious that successful exchanges should provide various trading tools. CEXs are better in this case, as they allow margin trading, lending, APIs for investors, tools for institutional traders, various currency pairs, orders, and discounts. Thus, users are more likely to join these websites because of the great functionality for both newcomers and experienced market players.
DEXs may face issues related to low volume and complicated trading process. Decentralized platforms feature only the basic orders without other types like stop loss, for instance. Coin pairs are limited, too. There’s no margin trading or lending, so investors may find these services too plain.

3. Safety

It’s the main point to consider for a lot of traders. So far as hackers are very active in the crypto world, safety measures are essential. CEXs use traditional tools to protect users’ money: encryption or cold (offline) storages. In a lot of situation, this is not enough. Hackers stole almost $1 billion during this year, and the history of the biggest attacks shows that centralized architecture is still vulnerable no many malicious strategies.
DEXs are way more protected because they are based on blockchains with distributed nodes which are harder to break. More importantly, users don’t send money to in-system storages and trade from private wallets. The safety depends on participants of the deal but not on the exchange.

4. Privacy

The idea behind cryptocurrency guarantees anonymity and independence from national governments or financial authorities. But it’s not that simple when it comes to trading services.
Because of local regulations, CEXs ask customers to provide some sensitive information. These platforms must follow KYC/AML requirements to counteract illegal transactions. Also, centralized exchanges can be blocked by governments.
DEXs represent crypto’s principles more strictly. They are truly decentralized, so authorities can’t manipulate or close them. This leads to the perfect level of privacy – traders don’t have to send any information except wallets’ public addresses.

5. Popularity

Thanks to their volume, liquidity, and trading functionality, centralized exchanges have a larger audience. They emerged earlier than DEXs and had more time to introduce their services. They are still more trusted because of their history and a wide number of users. User-friendly interfaces and a wide range of trading tools also add to the popularity of CEXs. For DEXs to succeed, way more people should be educated about their benefits.

Coexistence of exchanges

Most likely CEXs and DEXs will continue coexisting but the current trend stands for the very slow increase of the latter. While centralized services are way more convenient based on their speed, volumes, and various functions, decentralized ones are better in terms of safety and privacy. It seems that DEXs correspond to the idea of crypto and therefore have to be used more.