What is a Crypto Exchange? Centralized and Decentralized

Using a crypto exchange is something more and more people are doing to invest in cryptocurrencies like Bitcoin. But what’s the difference between Centralized and Decentralized exchanges? 

Looking to learn more about the basics of Crypto? Check out our Crypto terms every investor should know.

What is a Centralized Crypto Exchange?

Centralized exchanges are the most prevalent and most popular type of exchange a person can use to trade cryptocurrency. There is more trade opportunity with a centralized exchange, and the liquidity value is much higher as well. A large number of people can use a centralized exchange at one time, and there’s a lot more support on offer for these users too. 

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When using a centralized exchange, a person would simply need to allow funds to be available to be traded, and then the owner of the exchange (or the broker) would then go on to make the trade themselves. As a result of this, any private keys are kept in the broker’s hands, and the person who deposited the funds would not have access to them. 

All in all, with a centralized exchange, the owners of the transaction are the ones calling the shots, and there’s a lot more regulation like you would see in the stock market (or other investment markets). 

Of course, one of the main disadvantages of using a centralized exchange is the fact that all the information on the transactions involved is kept in one place, by one authority, which makes them vulnerable to attacks. Using a centralized exchange would require a lot of experience. 

What is a Decentralized Crypto Exchange?

In comparison to the information above, a decentralized crypto exchange is an independent form of buying and selling cryptocurrencies. A decentralized exchange relies on the blockchain and associated technology to get into the marketplace. Someone would be in charge of the server that the marketplace runs on, but the buying and selling portion itself would be completely free of an overseeing body. 

Decentralized exchanges are made with the user in mind. They place a person in charge of their own security and allow a higher amount of control over any funds. A decentralized exchange is on the digital side of things as a result; the end-user is in charge of what goes on, and there’s little need for something like a digital wallet. 

Instead, digital signatures are used to track transactions and authorize them in turn, meaning the actions performed on a decentralized exchange will be a lot slower than those of a centralized exchange. 

Of course, real decentralized crypto exchanges are rare, and there is not enough computing power in the world to allow for a rapid processing decentralized exchange. Moreover, many decentralized crypto exchanges are mislabelled and are simply centralized exchanges in disguise. 

Why Is There a Difference? 

Many people do not believe in the total centralization of cryptocurrency; it would not keep the user in mind. It would only focus on the buying and selling of cryptocurrency itself. This flags up security issues in crypto trading. 

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