The cryptocurrency market is booming, and in order to participate, people can trade or buy cryptocurrency on exchanges that function much like exchanges or the stock market in real life. On these exchanges, you can use fiat money such as USD or cryptocurrencies such as Bitcoin to buy other cryptocurrencies at set prices.
These exchanges are either centralized, or decentralized. What’s the difference? The bottom line is that centralized crypto exchanges have a middleman between buyers and sellers, while decentralized exchanges support direct transactions that are peer-to-peer only. This is a deeper analysis into the difference between the two exchange systems.
Centralized Cryptocurrency Exchanges
When cryptocurrency was first introduced to the world, centralized exchanges provided currencies like Bitcoin and Ethereum to a global audience. They provided essential push and liquidity to crypto markets, but that came with criticism and some failure. There were many exchange hacks and bans by governments from China, Korea, and Russia. There were also poor support systems that came with these exchanges that could create difficulty for users.
The main issue with centralized exchanges is that bans and hacks can occur because you don’t actually own the cryptocurrency you buy through these exchanges; the exchanges don’t give you the private keys to your funds, and merely credit crypto numbers. With these exchanges, much of the power and control lies with the middlemen.
Centralized crypto exchanges include Bittrex, Coinbase, BitMex, and Kraken.
Decentralized Cryptocurrency Exchanges
Many people believe decentralized exchanges are the future of crypto, and part of the purpose behind creating cryptocurrency in the first place was to create a financial system that cut out central authorities and governments to put more power and control into individual’s hands. With decentralized exchanges, the middleman is taken out.
These come with their own problems, however, such as limitations of blockchain technology and scalability. They also can run slowly and sometimes have a lack of traffic. If there aren’t enough buyers or sellers on an exchange, it’s akin to a death for the platform.
Decentralized exchanges include EtherDelta, OasisDex, Cryptobridge, WavesDex, and Altcoin.io.
If cryptocurrency continues to be pushed further and further into the mainstream, decentralized exchanges may be needed more. Part of the appealing aspect of cryptocurrency in the first place is the promise of more power and control for the individual, and less central authority or government meddling. Many people believe the future of crypto lies in decentralized exchanges.
For now, both types of exchanges are in operation, and each comes with its own set of risks. Many people enjoy exchanging on decentralized platforms so they don’t have to deal with a middleman and can obtain the actual private keys to their cryptocurrency, but these platforms run slowly and may not exist if there aren’t enough participants. Centralized exchanges are much more popular, but you won’t actually own your crypto, and these are at the mercy of bans and hacks. Before you invest in crypto, conduct research to decide the best type of exchange for yourself.