A quick disclaimer upfront: All information given in this presentation is researched and intended to be educational and illustrative to the specific topic, as always. Any companies, products, people, or other items mentioned do not constitute an endorsement, recommendation, or relationship. Every owner has to do their due diligence, as the decisions and responsibilities about any investment lie with the owner. This information is not financial advice.
What is a centralized exchange?
A centralized exchange (or CEX) is a centralized unit for the collection and management of cryptocurrencies through a public, known settlement. It distributes a number of units of any cryptocurrency, which can be collected and traded centrally in one place by a buyer for a fee paid to the platform and blockchain operator.
What is a decentralized exchange?
A decentralized exchange (or DEX) is a decentralized unit for the collection and management of cryptocurrencies via anonymous settlement. It is important that the decentralized marketplace is connected via a respective blockchain and offers the available or bridged tokens (also called pegged tokens), which are then held and controlled in a decentralized manner in a separate, self-created and managed wallet. The fee goes to the operator of the decentralized exchange and the blockchain operator.
Advantages and disadvantages of each type of exchange
With centralized and decentralized exchanges, there are advantages and disadvantages that are of interest to respective investors and weigh a decision more or less.
Centralized exchanges offers the advantage of ease of use. All you have to do is register, go through a get-to-know-you process (also known as Know Your Customer or KYC), and then you can buy, sell, and trade your cryptocurrencies with a simple login. The cryptocurrencies are then stored on the platform and managed by the platform operator, which not only reduces complexity but also reduces labor.
The big disadvantage here is that with centralized exchanges the chance is high that in the case of an attack on the platform and a theft occurs, your own currency is gone. Since the security is largely on the platform operator, it is especially important that you take a platform in addition to your own trading, where the security is also knowingly given. There is the classic saying "not your keys, not your crypto", which means as much as "if you do not manage the currencies yourself, you do not own them".
With decentralized exchanges, this is different. These trading platforms only offer the connection to a specially created wallet, which you have to manage yourself for the storage and distribution of your own cryptocurrencies. This offers the certainty that if the security principles in crypto are used and applied correctly, you yourself are the master of your finances and know exactly where your currency is with your own certainty. The downside, however, is that even the slightest mistake, such as imprudent trading with currencies that are not legitimate, can create security vulnerabilities that can empty the entire wallet.
In addition, the level of knowledge necessary is higher, which discourages many from this type of action. Therefore, due diligence is vital if you want to deal with your own cryptocurrency management.
How to choose which type of exchange to use
The decision between using a centralized and a decentralized exchange can be made by various factors.
As an investor, choosing a decentralized exchange is certainly the safer alternative in terms of managing funds, but the centralized exchange is the faster and more relaxed option. Availability of tokens is mostly higher on centralized exchanges, but the unbound trading on decentralized exchanges is a strong plus for the respective buyer of cryptocurrencies.
As the leader of a project, unless there is a specific reason, the primary goal is to end up on a centralized exchange to increase the availability of its own cryptocurrency. The sense behind this is that as many as possible have the chance to buy the token, which is less the case with a decentralized system, unless it is a connected system with many partners, then this argument is void. Classic examples of broad-based, decentralized exchanges are UniSwap, Sushiswap or the SafeMoon SWaP. A reason for many smaller projects to choose a decentralized exchange is also the listing requirement and the costs, which can differ from centralized exchanges. This can result in savings at the start of a project, which can be beneficial for the creation and management of a new project.
Future potential for projects and holders
Decentralized and centralized exchanges in crypto are the future. The trading of the future, the new currency structure and the opportunity to invest are not only made possible here, but also driven forward.
Companies, projects and individuals are looking more and more to crypto as adoption continues to advance. As a result, curiosity is rising, investment mass is increasing and general interest is growing immensely.
With all the potential for growth, as always, two factors are important: security and regulation.
Nothing is more damaging than a platform that is unprotected and allows attackers to take money invested by others. The regulations with licenses, trading availability and areas of application in the world are also important and must not be neglected, because once crypto is completely adopted by the world, there is no stopping it, and the platforms that are prepared become new, unattainable world platforms - no matter whether they are centralized or decentralized.