Cryptocurrency exchange SaaS solutions can be centralized, decentralized and hybrid. Centralized exchanges are the most attended platforms: 10 billion USD daily trading volume on Binance. Decentralized and hybrid exchanges are gaining popularity: 800 million USD daily trading volume on dYdX. Today, in detail about centralized and decentralized exchanges, their strengths and weaknesses.

Centralized Exchange

A centralized cryptocurrency exchange (CEX) allows exchanging, storing, buying, sending virtual assets.n CEXs have watchdogs that:

 

• Control wallets,
• Track operations,
• Maintain functionality,
• Updates the platform.

 

This scenario resembles traditional banks: a client opens an account, transacts money, stores it. The bank owns the money, not the client. The same is true for CEXs.

 

Examples of CEXs: Binance, Coinbase, Kraken, KuCoin, Bitfinex, Gemini, Coincheck, Bitstamp, Bybit.

Pros of CEX

CEXs are popular among investors because these platforms guarantee stability and security. Beginners also prefer centralized crypto exchanges as CEXs provide convenient interface and wide trading functionality. Other advantages of CEXs:

Safe transactions

Centralized exchanges implement KYC and AML algorithms. KYC checks verify each client: their identity, country of residence. AML verification helps to detect fraudulent operations and eliminate them. These strategies protect users from risky transactions.

High liquidity

There are several liquidity providers that produce a high turnover on CEXs. Orders can be executed instantly. Good liquidity reduces slippage fees and high spreads. Plus, big liquidity retrench volatility and rate counterfeit.

Proven altcoins

CEXs are secured from fraudful projects. If an altcoin ends up on a centralized exchange, like Binance or Kraken, it means the coin passed strict checks. Plus, listing cost a considerable sum, starting from 5% of ICO.

Integrated insurance

Multi-stage protection is not always enough to secure crypto assets from hackers. Centralized cryptocurrency exchanges insure users. For that, clients pay a fee. Yet, these measures guarantee the safety of assets.

Cons of CEX

Centralized exchanges are popular and offer professional tools for trading. However, CEXs have several disadvantages:

Obligatory verification

KYC checks protect accounts and funds. That said, it is deanonymization too, which diverges from the anonymous nature of cryptocurrencies. Besides, there is a risk of personal data leaks.

Uncontrolled assets

Assets stored on a CEX’s wallet belong to the platform. Clients can withdraw crypto to personal wallets. But the exchange may go bankrupt or get hacked before users transfer the money.

Security risk

Hackers often break into CEXs hot wallets. Hackers can sneak into decentralized exchange wallets as well. With CEXs, however, clients are helpless. If a CEX is hacked, it is a problem of the CEX. Users lose their crypto anyway.

 

Decentralized Exchange

A decentralized cryptocurrency exchange (DEX) allows p2p trading. Traders send crypto directly to each other, without an intermediary. Most DEXs operate on the Ethereum blockchain because it has smart contracts, lines of code that enable execution if conditions are met. Smart contracts equip DEXs with algorithms that establish the price of crypto assets.

 

To assist transactions, investors place assets in liquidity pools. Liquidity pools provide liquidity to a DEX. While liquidity pools investors collect interests.

 

Examples of DEXs: Uniswap, Covo, SushiSwap, Pancake Swap, Curve Finance, dYdX.

Pros of DEX

Decentralized exchanges usually have a developer who works on smart contracts and elaborates protocols. Nevertheless, DEXs are more secure platforms since there is no central governor that can be tampered with. Other advantages of DEXs:

Simplified inventory

DEXs do not have order books that display information about placed orders. Clients transact cryptocurrencies directly. There is no margin trading, limit and market orders.

Anonymous trading

Traders can anonymously trade virtual assets. DEXs do not have KYC and AML checks. Besides, users do not need to provide personal data: passport ID, photo, country of residence.

Inaccessible wallets

Only clients can access their assets. Decentralized exchanges do not store users’ money. So, neither developers nor authorities can freeze funds or impose restrictions.

Proof code

Transactions are based on blockchain and are triggered by smart contracts. Authorized entities cannot intrude on an operation. Nor can scammers.

Cons of DEX

Decentralized cryptocurrency exchanges rank below CEXs in the volume of trading. Total decentralization brings disadvantages:

[h4] Cross-chain trading

DEXs allow users to trade tokens that belong to one blockchain network. Some sites introduce cross-chain bridges, which complicates an exchange process.

High commissions

Transaction fees are higher on DEXs than on CEXs. Moreover, since transactions are carried out directly in the blockchain, a user pays the network commission. In protocols, like Ethereum or Bitcoin, the commission can reach dozens of dollars.

Limited inventory

P2P trading can hardly be called a full-fledged exchange. There are no order books, no orders: sell stop, buy stop, sell limit, buy limit, etc. Such inventory deficiency can complicate trading and lead to losses.

Which is Better: CEX or DEX?

The choice relies on a client’s objective. Active traders will benefit more from a centralized exchange. They can save money on commissions, employ a wide trading inventory, such as margin trading, cryptocurrency futures, and complete deals quickly.

For long-term investors or traders with few trading transactions, DEXs work best. Assets remain in personal wallets without third parties accessing them. Venture investors can also profit from DEXs because they can reach emerging crypto assets right after the launch.

If anonymity plays a role, then DEXs again. This opportunity though will be closed: regulators are working on a legislative framework for decentralized exchanges to know their client.