June 17, 2024

What is the difference between centralized and decentralized cryptocurrency exchanges?

To trade stocks and index funds, many day traders use centralized exchanges andonline brokerage firms. As a rule, having put $ 25,000 in his cash account, a trader can bypass the regulatory rule on the day trading strategy and immediately start actively trading. In addition, the presence of a margin account will also allow an individual investor to take short positions and buy commodity resources and futures.

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If we talk about crypto trading, thenRetail investors have different options for trading digital assets. With a market capitalization of $200 billion, there are more than 200 crypto exchanges, including crypto dark pools and traditional Bitcoin-focused securities exchanges. To understand how and where a retail investor can purchase digital assets, we will compare the two most popular types of crypto exchanges available in the cryptocurrency space today.

CEX, or centralized exchanges

Investors thinking about trading for the first timecryptocurrency, usually resort to centralized exchanges. Similar to traditional online brokerage firms and exchanges, many centralized crypto exchanges offer similar options for funding accounts, margin trading, shorting, and trading crypto/crypto or fiat/crypto pairs. Buyers and sellers trust an intermediary to help them hold funds and conduct transactions or provide security and monitoring. The largest crypto exchanges in the world by adjusted trading volume are usually centralized exchanges (Binance, Bitmax, OKEx, etc. - see CoinMarketcap). In addition to volume and liquidity, CEXs usually have a well-designed system that automates the client experience. Unlike using a digital wallet, where there is a risk of forgetting your private key, centralized exchanges can guarantee the safety of client funds and help investors regain access to their capital.

Despite the fact that CEX last few yearsbeing the most popular way to trade cryptocurrency, they demonstrated vulnerabilities and security concerns. In 2018 alone, hackers stole more than $ 1 billion from centralized exchanges. This is equivalent to a daily theft of $ 2.7 million. Compared to 2017, the total amount stolen on exchanges grew 13 times last year. Also, CEX is not anonymous, as they store personal data of investors and private keys and keep their funds in hot wallets. This practice can definitely pose a threat to the personal data of investors. Many CEXs have also been accused of fictitious trading and volume boosting.

DEX, or decentralized exchanges

Unlike CEX, on decentralizedCrypto exchanges allow anonymous transactions with a minimum of information about each investor. Decentralized exchanges are preferred by more experienced crypto traders who want full control of their funds and, to a certain extent, their personal data. DEXs provide better security because they do not have access to investors' private keys and do not require clients to hold funds in hot wallets, whose vulnerabilities have allowed hackers to gain access to investor capital in the past. However, this does not mean that hot wallets should be avoided entirely. They still speed up transactions, although they have inherent security risks. Simply put, they can be compared to checking accounts, and cold wallets can be compared to savings accounts.

In addition, opening an account with DEX can be quiteeasy. For example, OpenLedger, a decentralized exchange from Denmark, does not require registration or customer identification, which greatly simplifies the whole process. Another DEX, Bitsquare, uses Tor to ensure complete transaction anonymity. Decentralized exchanges are better for those who are interested in buying a large amount of cryptocurrency or in trading ERC20 tokens. In addition to anonymity and complete control over capital, the blockchain revolutionized margin trading. In other words, blockchain made it possible to replace margin trading with a revolutionary hedged trading system where traders can acquire digital assets by depositing their funds in an escrow account.

CEX vs DEX

Investors should understand that they cantrade cryptocurrencies on different exchanges. Understanding the benefits of exchanges of various types can have a huge impact on the financial performance of a trader. While CEX can offer good liquidity, DEX provides investors with better anonymity and offers a revolutionary hedged trading system that was not possible on central exchanges. Beginner crypto traders usually prefer centralized sites, as they remind them of the well-known NYSE and NASDAQ exchanges and online brokerage firms such as E-Trade and Ally. Also, investors who are not involved in high-frequency trading may come up with secure anonymous p2p sites, such as Hodl Hodl. When a trader gains experience in cryptocurrency trading, or if he does not want to risk capital in margin trading and prefers to use a hedged trading system, he can switch to DEX, where he will have full control over his crypto assets.

CEX, DEX, cryptocurrency dark pools, OTCp2p sites, brokers, CMEs and CBOEs with their Bitcoin-related securities are all part of the global cryptocurrency ecosystem. Each player has an important role to play in building a large-scale blockchain economy, and each contributes to the existence of others.

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