Differences Between Centralized and Decentralized Crypto Exchanges - Here Are Advantages & Disadvantages of Both

Cryptocurrency, the term is no more new for the people around us.

Everyone is aware of what cryptocurrency means.

Almost everyone knows how this digital currency is becoming the new platform for investment.

And in fact to some extent, everyone is aware of the functioning of cryptocurrency as well. 

But, still there are various terms about crypto which are not known to the people.

One such term is centralization.

Everyone is talking about how cryptocurrency is the new age decentralized mode of investment, but many are unaware of what this decentralization means.

What Does Centralization and Decentralization Mean?

In simple words, centralization means when there is a central body controlling and governing the other bodies.

And decentralization means when no such central body is involved.

In business, centralization refers to the presence of some third-party between the two parties carrying out the exchange.

What is a Centralized Exchange?

Cryptocurrency platforms involve transactions and involvement of real money of the person. That makes the person curious about the safety of the platform.

There are many people who don’t believe their money can be safe on the internet. So, the presence of a middle man or a third-party helps them to trust the platform.

This kind of exchange where transactions has been carried out through a third-party, is called a centralized exchange.

What is a Decentralized Exchange?

Just what the name suggests, a kind of exchange without involving any third-party or central body is called a decentralized exchange.

In such exchanges, users are allowed to execute peer-to-peer transactions.

Both the exchanges, whether centralized or decentralized, have both advantages as well as disadvantages. Let's look at them one by one.

Advantages of Centralized Cryptocurrency Exchanges

• Using cryptocurrency platforms without any guidance, storing money in digital wallets and direct transactions between buyers and sellers become cumbersome for many users.

So, the presence of a third-party decreases the stress and difficulties for the users.

• Trusting the internet for storing currency is very doubtful for a lot of users, so a middleman or a central body makes the platform more trustworthy for the crypto users.

• Shifting from conventional ways of investment to the new way of investment that is by cryptocurrency is a kind of difficult thing for some users.

Having a central body for the transactions and clearing all the doubts and confusions lowers the hesitation of the users to a great extent. It also assures them about the security of the platform.

Disadvantages of Centralized Cryptocurrency Exchanges

• Centralized exchanges are operated by some centralized companies which are responsible for carrying out a safe transaction between the users.

Despite having security in those huge companies, they are prone to be hacked. If by any chance, the data of the company is hacked, your money is at risk.

• If a company is responsible for carrying out your transactions, it is quite obvious, it will charge some amount. These amounts may be less or more depending on the company.

With this, we are done with discussion over advantages and disadvantages of the centralized mode of cryptocurrency exchanges.

A clear picture of differences between centralized and decentralized exchange will form only after looking over the pros and cons of decentralized exchange as well.

Advantages of Decentralized Cryptocurrency Exchanges

• Since, the transactions are peer-to-peer i.e. between the two parties only, there are less chances of scams and frauds.

• Unlike the centralized exchanges, customers are given more privacy in decentralized crypto exchanges. When a user signs up for an account in a decentralized crypto platform, the user’s details are kept anonymous.

• If you are concerned over the risks of hacking, decentralized exchanges are for you. It is because, in these exchanges, there is no involvement of any third party, hence the user doesn’t need to transfer his/her assets to any middleman, that’s why these exchanges are less prone to hacking.

• As exchanges are peer-to-peer, the users are less prone to manipulation by different companies competing in the market.

Disadvantages of Decentralized Cryptocurrency Exchanges

• Decentralized crypto platforms don't provide any guidance to the users. So, using such platforms sometimes becomes complicated for the users.

• The biggest disadvantage of decentralized crypto exchange is that it doesn’t allow users to trade government issued money in exchanges of cryptocurrency.

So, here users can’t buy coins or tokens of cryptocurrency in exchange of paper currency they hold.

As now we have gone through both the pros and cons of centralized as well as decentralized crypto exchanges, we can come to a conclusion that choosing one of them completely depends on the user.

Different users may have different mindsets so obviously they will go for different ways of exchanging.

As per the current scenario, use of decentralized exchanges are less than that of centralized exchanges. 

But with increase in the number of people understanding the concepts of cryptocurrency, the scenario may change as well.

Written By: Nidhi Jha

Edited By: Komal Jha