Wondering what the difference is between centralized vs. decentralized crypto exchanges?
In this guide, we’ll explain the difference between these two. By the time you’re finished reading, you’ll understand the advantages and disadvantages of centralized and decentralized exchanges!
What does decentralized mean in cryptocurrency?
When a platform or cryptocurrency is ‘decentralized’ it means that no central authority — such as a government or a financial institution — has control over it.
The ethos of decentralization is foundational to the crypto ecosystem. Cryptocurrencies like Bitcoin were designed to be free from manipulation by governments and other centralized entities.
Because decentralization is such an important principle in the cryptocurrency world, many investors choose to use decentralized exchanges to trade crypto!
What is the difference between a centralized and decentralized crypto exchange?
Centralized exchanges (CEXs) and decentralized exchanges (DEXs) offer different benefits to crypto investors.
Centralized exchanges explained
Centralized exchanges offer user-friendly interfaces for beginner investors and an easy way to buy crypto with fiat currency! However, critics complain that centralized exchanges go against the principles of decentralization.
Decentralized exchanges explained
Decentralized exchanges allow users to trade cryptocurrency peer-to-peer, with no centralized entity acting as an intermediary! However, decentralized exchanges often have difficult-to-use interfaces, which means they aren’t the best option for beginner investors.
What is a centralized exchange?
How does a centralized exchange work?
In a centralized exchange, you deposit your cryptocurrency in a platform like Coinbase or Binance. These platforms act as intermediaries for buyers and sellers. For example, if you wish to trade Ethereum for Bitcoin, the centralized exchange will supply the liquidity to make this trade possible.
Centralized exchanges often have easy-to-use interfaces — which makes it easy for users to buy, sell, and trade crypto! In addition, these platforms typically work with regulators to stay compliant with the latest cryptocurrency laws and often offer features that decentralized exchanges do not — such as customer support!
To use a centralized exchange, you’ll typically need to deposit your cryptocurrency on an account held by an exchange.
What are the major downsides of centralized exchanges?
Not your keys, not your crypto: When you store your cryptocurrency on a centralized exchange, you do not have access to your private keys. In the past, investors have lost crypto stored on centralized exchanges due to hacks and bankruptcies.
Less variety: Centralized exchanges take steps to manage risk and comply with government regulations. As a result, they often have less cryptocurrencies available than decentralized exchanges.
Know Your Customer regulations: Centralized exchanges may not be a good option for users concerned with privacy. Exchanges like Coinbase require users to submit their personal information to comply with KYC (Know Your Customer) regulations.
Centralized exchanges examples
Here are some of the most popular centralized exchanges in the world.
Coinbase: Coinbase is an American crypto exchange originally founded in 2012. Coinbase is considered a great option for beginner investors and the company is famous for working with regulators worldwide.
Binance: Binance, the world’s biggest cryptocurrency exchange by volume, was originally founded in 2017. The platform is famous for offering a large selection of cryptocurrencies, but has run into issues with regulators in recent years. Binance is no longer available in the US and other countries.
Kraken: Kraken is an American-based exchange originally founded in 2011. Unlike other cryptocurrency exchanges, Kraken offers access to advanced transactions — such as margin trading!
Fore more information, check out our guide to the best cryptocurrency exchanges.
What is a decentralized exchange?
How does a decentralized exchange work?
Decentralized exchanges allow users to make peer-to-peer cryptocurrency trades while maintaining control of their private keys.
When you use a decentralized exchange, there’s no need to deposit your cryptocurrency in an exchange account — instead, you can simply approve the transaction while using a self-custodial wallet like MetaMask or Coinbase Wallet!
Unlike exchanges like Coinbase, decentralized exchanges don’t have prices determined by a central authority. Instead, the protocol uses automated market maker algorithms to determine price automatically. Meanwhile, liquidity is provided by other cryptocurrency investors!
What are the major downsides of decentralized exchanges?
Low liquidity: Compared to centralized exchanges, decentralized exchanges have low liquidity — which means that it may take more time to execute transactions.
Complex: DEXs sometimes have more complex user interfaces compared to centralized exchanges. As a result, they’re usually more suited for experienced crypto investors.
No fiat on-ramp and off-ramp: DEXs don’t offer a way for users to buy cryptocurrency with fiat currency, or convert cryptocurrency to fiat currency.
Decentralized exchanges examples
Let’s walk through a few popular decentralized exchanges.
Uniswap: Uniswap is one of the world’s most popular decentralized exchanges. Built on Ethereum, the protocol allows users to swap ERC-20 tokens like Chainlink, Wrapped Bitcoin, UNI, and more!
PancakeSwap: PancakeSwap is a decentralized exchange built on the Binance Smart Chain. The exchange is famous for offering low blockchain trading fees!
dYdX: dYdX is a decentralized exchange that offers advanced transaction types like lending, borrowing, and margin trading! dYdX is a great option for advanced traders looking for a DEX.
For more information, check out our list of the best decentralized exchanges.
Should I use a decentralized or centralized exchange?
The answer to whether you should use a decentralized or centralized exchange depends on your unique situation.
If you’re a beginner investor, a centralized exchange may be the better option. However, if you’re looking to retain control over your private keys, a decentralized exchange may be better for you.
Some investors choose to use both decentralized and centralized exchanges. For example, an investor could use decentralized exchanges for most transactions, then transfer crypto to a centralized exchange to convert their holdings to fiat currency.
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