Both centralized and decentralized exchanges are widely used in the crypto trading market. What is the difference and how does it affect you? Learn about the difference between a centralized and decentralized exchange, pros and cons of each, and pick one best suited for you.
hat does it mean for a system to be centralized? What significance does this have to the average person? With Bitcoin and blockchain getting more notoriety, programmers are now working with blockchain technology to help create decentralized apps to make interactions peer to peer.
What does centralization and decentralization mean? Simply put, both are forms of organizational structure and the distribution of information/value. A centralized structure has one governing point of power. For example, a CEO of a company distributing information and making decisions as they see fit.
A decentralized structure is a little more abstract as there is no one point of governing power, but instead, everyone within the structure are free to make decisions, or share information on their own. The best example of a decentralized system would be the internet, as long as anyone has a connection, anyone can log on and participate in any form of information sharing they desire.
At the moment, a lot of the things we use in our daily lives are centralized systems. When we make a deposit at the bank, we all trust that the bank will hold it securely. The bank is in control of thousands of people’s money making it a centralized system. When we log into our email accounts, we trust that Google, Outlook or company that has our information will keep our information private as we use their platforms.
Since all the valuable information is stored in one single point or server, centralized systems can process information very fast and are easy to develop for. However, since all the information/value is stored in one point, centralized systems have a lot of control over the information/value they store, and are susceptible to hacks.
In the cryptocurrency world, most of the popular exchanges are centralized systems. We sign up and provide the exchange with our information, and we trust the exchange to keep our information and assets safe in their systems. When we want to complete a trade, the exchange acts as a middle man taking the assets from both parties and exchanging them to the appropriate trader.
Due to the centralized system, the user interface is very easy to use and trades are completed at a very high rate at very high volumes. The familiarity with centralized systems also allows for programmers to develop features that can be used by crypto traders.
Like other centralized systems, centralized exchanges have the same weakness as there is one single point of control. If a hacker were to access the point where all the information/assets are stored, the integrity of the system would be compromised.
A decentralized exchange is a fairly new concept that is trying to solve the weakness centralized exchanges have. Unlike centralized exchanges, decentralized ones do not act as middle men, instead decentralized exchanges act as a platform where trades are directly done from trader to trader and no information/asset is held through the system itself.
This removes the point of weakness centralized exchanges have, as each individual trader is still in control of their assets and they do not have to provide any of their personal information to the exchange. Even though decentralized exchanges bypass the weakness of traditional exchanges, the biggest drawback to them is that they are comparatively slower and more technologically complex to program for.
Due to the nature of direct peer to peer trading, it will take a trader a longer time to find someone else willing to accept their offer. In addition, the technology being used to develop decentralized exchanges is still new, so the user interfaces and features available are fairly limited. But like any new technology, there is room for innovation and growth which may show a future where decentralized exchanges are just as fast and easy to use as centralized ones.
In the end, both centralized and decentralized exchanges can coexist within the crypto trading market as both cater towards different types of users. Centralized exchanges can be used by people that want to trade in an easy, fast way, on a platform that can be proven to be trusted and secure. Those that use decentralized exchanges will be for those that want the extra security, privacy and the push for further growth within the decentralization space.
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