When buying or selling crypto you are most likely to be using an Exchange. In this article we look at some of the main differences between centralized and decentralized exchanges and why this matters when choosing how to trade your crypto.
Exchanges are the digital marketplaces where most crypto trading takes place. You might have heard of Binance, CoinBase, Kraken, Uniswap, and so on - these are all exchanges. Not all exchanges operate in the same manner nor offer the same possibilities, and over the last few years decentralized exchanges (DEXs) have increased in popularity among crypto users.
Centralized vs. Decentralized
A centralized exchange (CEX) works in a similar way to a bank. They are run by a company that oversees all the transactions, adding a layer of consumer protection, liquidity and regulatory compliance, in exchange for some fees. As a user of a centralized exchange you trust them to safeguard your coins, as they have absolute access to your coins - they act as a custodian and own the private keys to your account.
A decentralized exchange (DEX), on the other hand, is a one-to-one (peer-to-peer) marketplace where transactions occur directly between individual users who want to trade crypto. Instead of employing an intermediary organization, DEXs use smart contracts to automate and provide the necessary layer of protection against any potential scams, at a far lower fee than centralized alternatives. As a user of a decentralized exchange you don’t need to create an account owned by the exchange, and so you remain the sole owner of your coins until all conditions are met and the crypto exchange is executed by the smart contract.
DEXs in practice: advantages
Complete control over your crypto: you don’t need to rely on a third party to access your funds. Centralized exchanges keep the right to suspend trading of a given coin, freeze accounts, or even potentially close.
Real custody: DEX transactions are settled directly on the blockchain, while transactions on a centralized exchange are recorded on that exchange’s internal database.
Access to a wider diversity of cryptocurrencies: any new cryptocurrency must meet certain criteria to be listed in a CEX, but DEXs offer a virtually limitless range of coins, from the big popular ones to the newest to appear. This can be particularly useful to invest in hot projects before mainstream users do so - (but do your thorough research before you end up with worthless tokens!)
Lower transaction fees: DEXs eliminate intermediaries, reducing transaction fees to a minimum.
Private and anonymous: users of DEXs don’t need to provide personal data or complete a KYC procedure to trade or swap crypto.
An alternative with lower hacking risks: all CEXs take active measures to protect against hackers, yet the increasing trading volume of cryptocurrencies held by centralized exchanges is a very attractive target, while DEXs are transactions from one wallet to another.
DEXs in practice: drawbacks
Only crypto: DEXs don’t allow for exchanges between conventional currencies (like USD) and crypto — instead, they exclusively trade cryptocurrency coins for other cryptocurrency coins. If you want to exchange USD for crypto (and vice versa) you will need to use a centralized exchange.
Complex user experiences: navigating your way through decentralized exchanges can often be challenging for those less familiar with decentralized blockchain technology.
Liquidity is not guaranteed by any intermediary organization: this means that for less popular coins it could happen that you don’t find the exact crypto pair you want to exchange for, in a given DEX.
Gas fees can be volatile: while decentralized exchanges charge minimal transaction fees, users still need to pay gas fees - since the transaction is recorded in the blockchain. Gas prices depend on network traffic and can vary significantly at different times of the day/week.
Little (or none) customer support: DEXs are not run by a company, therefore you might be on your own if there is an issue or you make a mistake.
Decentralized exchanges (DEXs) are a closer fit with the decentralized ideology of cryptocurrency and blockchain, eliminating intermediaries and opening new exchange options for users. In fact DEXs have become a very popular option for many users, as they gradually improve their functionalities and usability.
Yet, operating with DEX can be intimidating for non-advanced users: interfaces can still seem complex and the process requires a few additional steps that aren’t present in centralized alternatives.
Fortunately, a lot of other applications, for example crypto wallets, have started integrating DEX services - and tackling some of the disadvantages of this type of exchange. With Zelus wallet you will soon be able to buy crypto with USD - and vice versa- and trade coins across multiple chains at the best price using various decentralized exchanges. All this in a few taps.