Centralised vs Decentralised Exchanges: Pros and Cons

An exchange is a website that handles the trading of bitcoin to fiat or other altcoins, like ethereum, Tether, XMR, and others. Most cryptocurrencies are currently traded on centralised exchanges, despite the irony that cryptos were created to be decentralised by nature.

Although centralised exchanges are user-friendly, it is by no means as secure as decentralised exchanges. This might explain why we have seen nearly one hack a month, where hackers exploit vulnerabilities of centralised exchanges to steal millions worth of crypto.

The biggest threat to cryptocurrencies is not volatility, as most assume. Instead, it is the fact that about 99% of cryptocurrency trades still happen on centralised exchanges like Binance and Bittrex. The time is not very far from when we will see this trend changing. In fact, it has started to change as numerous centralised exchanges are proliferating with various approaches.

 

Centralised Exchange

Centralised exchanges has allowed greater accessibility to cryptocurrencies for people around the globe, while at the same time successfully providing more liquidity in the cryptocurrency market.

Even though crypto traders don’t actually own the cryptocurrency they purchase through centralised exchanges, it has been very popular and largely successful. The AML/KYC compliance standards for these exchanges has improved over time, due to increasing regulatory pressure from the US SEC and other financial bodies.

While this bodes well for the security of crypto traders, these regulatory pressures have also reduced the liquidity of ICOs, as many large exchanges have not listed most ICO tokens lately. But despite these issues, large numbers of people still trade on centralised exchanges, arguably due to its advanced features and ease-of-use.

Though they also have had a fair share of criticisms and failures, like exchange hacks, government bans and poor customer support. Not to mention the reality of system vulnerabilities like identity thefts due to leaks or malicious attacks.

Pros

  • User friendly
  • Advanced tools and features
  • High liquidity

Cons

  • Exchange controls users’ funds
  • Stringent AML/KYC checks
  • Not anonymous
  • Vulnerable to server downtime and malicious attacks

 

Decentralised Exchanges

A decentralised exchange is a market that allows users to perform peer-to-peer trading without going through a third-party system. They allow users to buy and sell cryptocurrencies from each other without the involvement of a middleman or a third-party.

This is made possible through creation of proxy tokens, assets, or through decentralised smart contracts, among other solutions that are currently being developed.

Crypto regulations, bans and malicious attacks have become a catalyst to the growth and improvement of decentralised exchanges. They are fewer in numbers compared to centralised exchanges, but the numbers are steadily rising.

At present there are certain limitations, like poor user experience and low liquidity, especially when an exchange hasn’t reached a critical mass of users it needs to run smoothly. It’s a reflection of the inherent constraint of blockchain technology – scalability. But this is slowly changing.

Aside from such weaknesses, one of the most attractive features of decentralised exchanges is by far is that it cannot be hacked and users can remain anonymous. It’s not a surprise then that even Ethereum’s creator Vitalik Buterin strongly opposes centralised exchanges and instead encourages wider adoption of decentralised platforms.

Pros

  • Complete control of your own funds
  • Low trading fees
  • No submission of personal identity documents
  • Anonymous
  • Invulnerable to malicious attacks

Cons

  • Clunky with poor user experience
  • Basic features
  • User’s personal computer vulnerable to malicious attacks

 

To centralise or decentralise, that is the question

Comparing between centralised and decentralised platforms, it appears that each has almost equal amounts of strengths and weaknesses. But the future of cryptocurrency trading will undoubtedly decentralised in nature. It’s in line with the ethos of crypto – safe, anonymous, and allows for low trading fees.

In the past, peer-to-peer trading became popular but only limited to file exchanges like songs, movies and other computer file formats. Today, peer-to-peer trading in a decentralised mode involves virtual currencies, and with this opens up a brand new way to transfer money across borders and perform currency trading in a safer and more profitable way.

As one of the largest peer-to-peer cryptocurrency trading platforms, Remitano also offers crypto swap trading.