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    Centralized vs Decentralized Exchange: Which One Is Better?

    Crypto exchanges are platforms that enable you to trade one cryptocurrency for another. There are two types of these platforms: centralized exchanges (CEX) and decentralized exchanges (DEX). Despite Web3’s most prominent feature being decentralization, centralized exchanges dominate. So, what’s the difference between the two? And, why do traders prefer one over the other? We’re here to tackle the centralized exchange vs decentralized exchange debate. 

    What Is A Centralized Exchange?

    Centralized exchanges are run by a company that acts as the middleman between buyers and sellers. CEX has a central point of reference. It’s not up to the buyers and sellers how things unfold. The company takes it upon itself to do things how it sees its best fit. 

    CEX has control over its users’ private keys, which are essential for trading. But, just because they’re in control doesn’t mean they’re bad. Honestly, from their position of power, they run multiple checkups to ensure security for their user base. 

    Trading on a Centralized Exchange

    1. Create an account on the CEX of your choice.
    2. Complete the know your customer verification steps.
    3. Connect your wallet.
    4. Transfer the amount of cryptocurrency you desire to the exchange. If you don’t have crypto, you can use fiat to purchase crypto through the CEX. 

    Once you set up your account and verify it, you’re good to go. 

    CEXs highly depend on order book matching technology to ensure smooth crypto trading. The order book system enables CEXs to accurately match buyers and sellers. Multiple centralized exchanges also use the services of market makers to provide liquidity for listed cryptocurrencies. 

    Centralized Exchange

    Advantages

    • User-friendly
    • Secure as new users have to go through multiple verification steps before they start trading
    • Supports fiat currency
    • Has high liquidity volume
    • Offers customer support and assistance

    Disadvantages

    • Controlled by a central entity 
    • Highly vulnerable to tracking 
    • Charges service fees
    • Lack of transparency 

     Centralized Exchanges

    What Is A Decentralized Exchange?

    A decentralized exchange is one with no central authority. It’s run by smart contracts. Users rely on self-custodial wallets instead of relying on a third party or an intermediary. So, unlike centralized exchanges, DEX is not in control of your private key.  When you send a transaction via a DEX, it’s directly sent to the other person’s wallet. 

    The exchange never takes custody of any trader’s assets. This crypto exchange is the one that’s most in line with the decentralized, and public nature of the blockchain. If you’re here because of these specific web3 characteristics, then probably DEX is the one for you. 

    Trading on a Decentralized Exchange

    Anyone with a smartphone and internet connection can use a DEX. You don’t need an email address or sign up to use a decentralized exchange. You must, however, have a wallet compatible with the DEX. 

    How to trade on a DEX:

    • Decide which network you want to use
    • Choose a compatible wallet with the chosen network
    • Fund it with the network’s native token

    And just like that you’re set to trade on the decentralized exchange. It’s important to note that you must buy native tokens from centralized exchanges. 

    Decentralized Exchange

    Advantages

    • Completely private and anonymous
    • No third party
    • Fees are redistributed to liquidity providers, not to a central entity
    • No censorship

    Disadvantages

    • Can be challenging for beginners
    • Doesn’t support fiat currency 
    • Risk of impermanent loss for liquidity providers
    • Thin liquidity

    Decentralized Exchanges

    Centralized vs Decentralized Exchange Debate

    Now that you’re well versed on both types of exchanges, let’s finally tackle the centralized exchange vs decentralized exchange debate. Which one is better to use? 

    The below table shows the differences between the two: 

    CEX vs DEX

    It’s clear that centralized exchanges have the upper hand in most categories. They’re more user-friendly, have more features, and they’re faster with higher liquidity. As mentioned previously, most users rely on centralized exchanges for their trades. 

    They do undoubtedly provide an easier and simpler experience for their users. Plus, they run check-ups so that’s an added layer of security. However, there is no middleman between you and other parties when you’re using a DEX.

    If you’re in Web3, there’s a high chance that you’re here because you enjoy the zero-censorship and decentralized nature of this space. CEX, unfortunately, doesn’t provide that. So, the decision is yours now, do you prefer liquidity over decentralization? Because no matter which side you pick, you’re forgetting one of these two. 

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