What is a decentralized exchange? different from centralized floor?
Exchanges are an important part of the cryptocurrency market. This is a playground that makes it easy for investors and users to access and exchange crypto assets. In recent times, the topic of decentralized (decentralized) exchanges is constantly being mentioned and it is considered an inevitable trend of the cryptocurrency industry. Vitalik Buterin – Ethereum creator once voiced strong support for these exchanges and asserted that centralized exchanges should be “burned to ashes” as much as possible. So what is a centralized exchange and a decentralized exchange? What is the difference between centralized and decentralized? Why do we need to change?
What is a centralized exchange?
It is an online platform and the most popular way to trade coins, including buying/selling crypto with fiat as well as buying/selling crypto against other cryptocurrencies. They can be seen as an online marketplace for the entire cryptocurrency network.
What is a decentralized exchange?
A decentralized exchange (DEX - Decentralized Exchange) is a trading market that does not rely on an intermediary service to store and manage customers' assets. Instead, transactions take place directly between users (a peer-to-peer network) through an automated process. In other words, a decentralized exchange gives control of assets and transactions to users, eliminating the middleman point that causes many problems such as hackers, scams. Besides, tax or confiscation of funds will be difficult to happen when trading on decentralized exchanges. Eliminate intermediaries to increase security, eliminate problems like fraud or Hack.
Some active decentralized exchanges: IDEX, Etherdelta, Bancor Network, Kyber Network, 0x Protocol, CoinChangeX, DDEX,..
Meaning of centralized exchange
Centralized exchange means you trust and entrust someone else to keep your money.
Previously, the word "centralized" could mean all financial management institutions.
Centralization means that there will be a trusted middleman handling any of your tradable assets. Example: In a bank, customers will deposit their money to the bank. This organization will have complete control over the client's funds.
In many cases, depositing money in a bank is much safer than keeping one's own money. Banks have many security measures and teams to keep customers' money. Banks can also offer a wide range of services, such as loans, because the bank has a large amount of money and has a trusting relationship with the customer.
Centralized exchanges are the same way. Users can store their coins on the exchange. The coin is held by the exchange, but the trust of the middleman makes it easy for a customer to recover a lost password or thanks to the 2FA feature because that customer has demonstrated full access to their account . This can also relieve pressure on clients as they have full control over their funds. There are many investors who lost hundreds of thousands of dollars because they lost the private keys to the hardware wallet. If the funds were placed in a centralized exchange, they wouldn't have to worry about it; recovery will be as easy as giving out your passport or verifying your identity.
How is a centralized exchange different from a decentralized exchange?
Cryptocurrencies and blockchains are decentralized by nature, so this makes exchanges decentralized as well.
Simply put, a decentralized exchange (DEX) cuts out the middle man by creating a very smart “trustless” environment. Transactions are done through smart contracts and atomic swaps so the currency doesn't have to go through a third party. It is just a peer-to-peer transaction. DEX is still in its infancy, but in 2018 users can see that decentralized exchanges have made a lot of progress.
Do all centralized exchanges offer fiat/crypto pairing services?
All exchanges have crypto/cryptocurrency trading pairs (e.g. trade 1 BTC for 9 ETH), but not all exchanges have fiat/crypto pairs (ie. is to use $900 to buy 1 ETH). The most popular exchanges that offer fiat/crypto pair trading are:
_Coinbase – the most popular exchange in the world, supports Bitcoin, Bitcoin Cash, Litecoin and Ethereum,…
_Gemini – based in New York, meets high US regulations. Supports Bitcoin and Ethereum.
_Kraken – has a wide variety of crypto/fiat pairs beyond just USD and EUR, which can be found on their website.
_Robinhood – a popular trading app that offers fiat currency pairs in exchange for Bitcoin and Ethereum.
Does volume matter to an exchange?
The more volume an exchange has, the less volatility it will have and the faster it will operate.
If Alice is trying to buy 1 BTC at the current price of $10,000 and the trading volume on the exchange is very high, she can buy 1 BTC almost instantly. If the market price is $10,000 on a very low volume exchange, she will probably only buy some for $10,000. Alice would then need to buy Bitcoin at a higher price, costing more money, and also causing the price of Bitcoin to move higher on that exchange.
Are centralized exchanges safe?
No centralized exchange is immune to hackers.
Many hacks have occurred throughout the history of cryptocurrency, there have been many cases where exchanges did not have enough funds to return to customers. Decentralized exchanges cannot be hacked, but users are more susceptible to locking. Centralized exchanges are only safe as long as the bank is not hacked.
Is verification required when opening an account on an exchange?
The regulations of each country are still unclear, but exchanges around the world require minimal verification to authenticate accounts.
Many exchanges allow users to open an account without identity verification, but those accounts will have extremely small withdrawal/deposit limits. Basic verification typically requires a photo on the user's passport/ID and 2-Factor Authentication (2FA). 2FA is a secret password that is regenerated every 30 seconds or so that the user must enter each time they want to log into the account. 2FA is usually stored on the user's phone.
Which exchange has the most trading volume and trading pairs?
As exchanges are still new and growing in popularity every day, there have been a number of exchanges with outstanding volumes and trading pairs in 2017.
_Binance. Although Binance was just launched in 2017, the trading volume is always among the highest. This exchange is based in China and is so popular that most altcoins want to be listed on this exchange first after the ICO. Level 2 Authentication allows users to withdraw 100 Bitcoins while Level 1 only allows withdrawals of less than 2 Bitcoins/day. _Bittrex. Bittrex is a longstanding cryptocurrency exchange based in the US. While the most popular coins traded are BTC and ETH, Bittrex offers over 250 trading pairs. This is a popular exchange with an easy to use interface for beginners to enter the market. _Bitfinex. Hong Kong-based Bitfinex, is another established cryptocurrency exchange that is still in the top 10 by trading volume. Upbit. While many South Korean crypto exchanges have suffered from domestic crackdowns, Upbit is still at the top and even broke the record in January 2018 with the highest trading volume ever. . _GDAX. Global Digital Asset Exchange is an extension of CoinBase, one of the most popular exchanges in the world. GDAX is not suitable for beginners but is very useful for margin trading as well as crypto/fiat and crypto/crypto trading. Users also get coverage up to $250,000 from the Federal Deposit Insurance Corporation (USA). While offering more options and features than Coinbase, Coinbase Vice President Adam White noted: “Coinbase is designed for retail customers while GDAX is focused on serving sophisticated and specialized traders. Karma."
Compare the difference between a centralized exchange and a decentralized exchange
The most basic difference between a centralized exchange (CEX) and a decentralized exchange (DEX) is evident through the following 3 features:
Funds Control
Exchange users focus on making deposits to the exchange to facilitate trading. These funds are controlled by an intermediary trading service. This means that the order book, as well as custody, are in the hands of a centralized exchange platform service.
In a decentralized cryptocurrency exchange, users trade directly with other traders without the need for a central server. There is not a centralized platform service that owns the order book and custody. Thus, the funds are controlled by the users and the parties involved in the platform.
Anonymity
Some centralized exchanges used to allow anonymous trading accounts on their platforms. However, new government regulations have emerged in recent months that have resulted in strict compliance with KYC and AML laws. It is very difficult to trade anonymously on a centralized cryptocurrency exchange platform. In contrast, a decentralized exchange is a place where everyone can stay anonymous.
Accuracy
The users of the centralized exchange depend on the platform to validate and authorize their transactions. In a way, the platform is a third-party intermediary that provides trusted crypto exchange services.
With a decentralized exchange, we do not need to depend on an intermediary. By smart contracts and several implementations of the Blockchain protocol, the entire system is built to provide trustless authentication and authorization of cryptocurrency exchange transactions.
Reasons for DEX to gradually replace
CEX Short transaction processing time, low fees
Decentralized exchanges have the ability to facilitate faster, more cost-effective transactions than centralized exchanges. Eliminating the middle validator significantly reduces fees and latency before a buy/sell order is processed.
The security of the floor is higher
Decentralized exchanges do not keep users' funds and no organization interferes with the processing, so it is very difficult for the exchange to be hacked. Meanwhile, historically, there have been many attacks on centralized exchanges such as Bitfinex, Bittrex, etc.
Seamless integration with secure hardware wallets
This is a big advantage of decentralized exchanges. Many decentralized exchanges offer seamless integration with popular hardware wallets like Ledger Nano S or Trezor to ensure much safer transactions.
Users can send coins directly from their hardware wallets to the smart contracts of many decentralized exchanges. With centralized exchanges, there is no way for users to manually enter their private key to transfer coins from the hardware wallet to the exchange. Because if they do, there is a very high chance that they will be scammed or track the keyboard.
Users have full control over the funds
A decentralized exchange is owned and controlled by all the participants so there is no centralized corporation that has the right to hold the client's funds. Control of money is always in the hands of users thanks to a peer-to-peer network structure. Transactions take place between parties in the network using smart contracts, which can only be controlled by the private keys of the parties. Users control their private keys as well as their capital at all times with a decentralized exchange.
Disadvantages of Decentralized Exchanges
Only support for few platforms
Currently the most popular platform for a decentralized exchange is Ethereum with a number of ERC-20 tokens being traded. In the future some other major platforms like NEO will also be supported by decentralized exchanges.
Difficult to use
This is why exchanges like Binance or Huobi are popular, simply because they are easy to use. A lot of smart contracts need to be navigated for use in decentralized exchanges, which can be dizzying for users, even for those who are tech-savvy.
Centralized exchanges also have simple user interfaces, are intuitively organized, and are easier to get started with than decentralized exchanges.
Lack of powerful features and functions
Most decentralized exchanges only support some basic trading functions. More specialized trading tools and features such as margin trading, stop loss orders, etc. are often missing in decentralized exchanges. This must be the main reason why decentralized exchanges are still not popular in the cryptocurrency market.