Centralized vs. Decentralized Crypto Exchanges (Pros & Cons)

Centralized crypto exchanges are platforms that allow users to buy and sell cryptocurrencies within an infrastructure managed by the exchange company. On the other hand, decentralized exchanges allow traders to trade directly from self-custodial wallets, without giving up control of their assets. Most new investors often wonder if they should use a centralized or decentralized exchange.

We have taken it upon ourselves to obtain the information that you have been seeking and have presented them to you in the most lucid form with simple terms to maximize understanding. In this article, you will learn about centralized and decentralized cryptocurrency exchanges. What is more? We have provided a wide list of the best Bitcoin exchanges and other cryptocurrency exchanges that satisfy these conditions as a working list that you can always choose from while making your decisions.

Here’s an outline to make your navigation easier:

• What is a Crypto Exchange?
• Basic Functions of a Cryptocurrency Exchange
• Types of Cryptocurrency Exchange
  • Centralized Exchange
  • Decentralized Exchange
• Factors to Consider When Choosing

What is Crypto Exchange?

A crypto exchange is an online platform for buying and selling digital currencies. It is an online platform that allows traders to buy, swap, invest, convert, sell and transfer their cryptocurrencies from one wallet address to another. Added to this, an exchange has several other features and services it renders to traders.

The most important of them is that: it allows traders to exchange their fiat money for crypto and vice-versa. Thus, without an exchange, it may be difficult to convert crypto to fiat money, especially in those countries where crypto has not been legalized. The services offered by a crypto exchange are very much similar to those of brokers. This is because crypto exchange bridges the gap between the trader and the crypto market, just like brokers do in the forex market.

Basic Functions of an Exchange

The functions that the exchanges perform for crypto traders are so numerous. Without a crypto exchange, it might be difficult to buy and sell crypto or even exchange it for fiat money. Below are the highlights of the important functions played by exchanges today:

• Linking buyers to sellers: The general purpose of an exchange is to provide liquidity for buying and selling crypto. Without an exchange, it will be very difficult to convert crypto into fiat money.

• Executing Market orders: Centralized exchange makes it easy for traders to place different orders at the market, to be executed at a later moment when the price gets to such points. To this end, all the exchanges today could be regarded as crypto brokers as they bridge the gap between the individual and the crypto market.

• Listing new Cryptocurrencies: Generally, new cryptocurrencies are brought to the knowledge of investors through an exchange. Without an exchange, it will be difficult to launch a new crypto project.

• Storage Medium: Often some investors use an exchange as a storage place for their crypto assets. Some buy and hold crypto for the long term through an exchange.

• Easy Payments using Crypto: Most exchanges today (for instance Binance) have added an extra feature to their exchange that makes it possible for traders to buy products outside the exchange using crypto. Thus, with ‘Binance Pay’ for instance, one can buy many products in those companies that allow crypto.

Types of Crypto Exchanges

There are two main types of Crypto exchange. They are: Centralized and Decentralized crypto exchanges. Other forms found today include a modification or crossbreeding of the two main types of exchange:

Centralized Exchange

A centralized exchange is the type of exchange that is built on a Central Server. All activities on the server are therefore monitored and controlled by the owners. This type of exchange is often regulated. This means users of the platforms can be traced in cases of fraud and misconduct. Hence, centralized exchange always requires its users to complete an identity verification process known as ‘Know-Your-Customer’ (KYC) before they are granted full access to use the platform. Above all, Centralized exchange enables users to exchange crypto easily into fiat money and vice-versa.

List of Top Centralized Exchanges

• Binance
• Coinbase
• Kraken
• Bitfinex

Centralized Exchange Pros

Many users today are attracted to centralized exchange more than any other form. Below are the major advantages of using a Centralized exchange:

• High security for assets: Centralized Crypto Exchange provides strong security for investors’ funds when it comes to buying and selling cryptocurrencies on their platform. This is often achieved through the identity verification process carried out on registrations. Thus, buyers and sellers are no longer faceless beings or ghosts but traceable merchants.

• Strong Liquidity: Centralized exchanges often provide high liquidity for buying and selling crypto. This makes it possible to exchange crypto fairly at the desired price without much slippage.

• Regulated: Most centralized exchanges are registered with the relevant financial authorities in the countries where they operate. This means investors can also trace the owners of the exchange through regulatory agencies should they ever abscond with the investors’ assets.

• User Friendly and Support System: Most centralized exchanges always make their platforms very easy to use; by providing a simple guide to users on how to ruminate their platforms. Equally, the centralized exchanges provide 24/7 customer support service channels to address various issues and complaints from their clients.

Centralized Exchange Cons

The following are the disadvantages associated with using a centralized exchange:

• Prone to security breaches: The fact that centralized exchanges use a hot wallet to enable their users to gain access to their platform has made them susceptible to attacks from hackers. Many criminals today now target the large volume of funds traded in centralized exchange as a good place to rob.

• Commissions are charged for each transaction: Very often, most centralized exchanges charge some commissions for using their platforms.

Decentralized Exchange

A decentralized exchange is one that is grossly unregulated. There is no control over the user’s actions. Many traders today prefer to carry out large volumes of crypto transactions without ever revealing their identity; and making it impossible to trace them. This is just how decentralized exchange serves this set of people. Thus, it is a crypto exchange medium where all transactions are carried out anonymously without any trace of the dealers.

List of Top Decentralized Exchanges

• Uniswap (Ethereum)
• Pancakeswap (BNB Chain)
• Raydium (Solana)
• QuickSwap (Polygon)

Decentralized Crypto Exchange Pros

• Helps to hide the identity of the users: Using a decentralized exchange gives the traders the kind of privacy they desire while carrying out their financial transactions. Most investors and big institutions use the decentralized exchange to hide their net worth to escape government taxation.

• Gives users total control over their assets: There is no central body that controls the decentralized exchange. Hence, users have full control over their assets and can decide what to do with them. The cases of hacking are highly minimized while using the decentralized exchange.

• Helps to surmount government sanctions: Very often, users from those countries where crypto trading is prohibited by the government; consider the decentralized exchange as the best way to overcome those government sanctions. This is because it is very difficult for the government to penetrate it.

Decentralized Crypto Exchange Cons

The following are the disadvantages associated with using a decentralized crypto exchange:

• Does not allow the exchange of Fiat Currency: It is not possible to exchange crypto for fiat money using a decentralized exchange. Doing so, no doubt, will reveal the identity of the receiver

• Highly Vulnerable: The founders of the decentralized exchange are not known to users. This makes all crypto transfers through them very prone to loss as the anonymous owners can easily abscond with them. Sadly, there is no way to trace them.

•  There is no one to complain to in cases of failed transactions: All transactions carried out on the decentralized exchange are at the owner’s risk. No one is available to assist new users or resolve failed transactions.

Factors to consider while choosing an Exchange

There are ten major factors one needs to consider while choosing a crypto exchange. The following factors are discussed:

• Regulation: Every country has a financial authority regulating all brokers offering financial services in their country. Only those exchanges that have fulfilled the demands of these regulatory bodies are recommended for traders today.

• Multiple options for Deposit and Withdrawal: Provision of multiple options for deposit and withdrawals such as Bank wire, Skrill, Neteller, Debit and Credit cards, Crypto, etc. are important considerations in choosing an exchange.

• Ease of Withdrawal: The number of days it takes to receive funds from an exchange is very important in making decisions on which exchange to choose. Good exchanges complete withdrawal orders within 24hrs.

• The number of tokens supported: Providing an extensive number of cryptocurrencies attracts more investors to an exchange. This increases the volume traded daily on such exchanges too.

• Presence of  Peer-to-Peer trading platforms: An inclusion of P2P trading platforms is very necessary especially for those countries where the banks are prohibited from facilitating Cryptocurrency transactions.

• Commissions charged: Good exchanges charge lower commissions for using their platforms.

• Customer Support Services: The availability of efficient customer support services to attend to a client’s needs is a very essential service required in every crypto exchange today.

• User review: One needs to visit  various expository websites to see the remarks that past and existing users have made about the exchange.

• Years of experience: One should choose only those brokers that have proved themselves tested and trusted through their long years of excellent service delivery.

• Global Presence: Best crypto exchanges existing today are known to have their branches and presence across other countries too and not limited to one country alone.