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Centralized and Decentralized Exchanges: Explained!

Mar 03, 2018

Centralized and Decentralized Exchanges: Explained!
1.
What is a centralized exchange?

An exchange is basically a market where assets are bought and sold. You might have heard about many centralized exchanges, but what does that mean? Centralized exchange means that orders of stocks or the shares are routed to the centralized exchange, and then they are matched with an offsetting order, which means that all orders are taking place at one particular location since they are all routed through the matching place.

For instance, you would like to buy some Ethereum with your fiat currency. So as to do so, you would have to transfer your funds to a centralized exchange. Following this, your fiat would be converted by the exchange into Ethereum at the existing exchange rate. These exchanges are fine since they are simple to access as well as utilize, plus give advanced tools and trading operations like stop loss, lending, and margin trading.

2.
What is the issue with centralized exchange?

So what’s the issue with centralized exchanges? Well, centralized exchanges pose a menace for the funds. Perhaps in recent times, you have heard of people losing their cryptocurrencies owing to hacking attacks. A few people prefer to keep their aforesaid purchased Ethereum on exchanges, rather than transferring them to their wallets. This is typically done for simplicity of access plus for a faster business. Even though this hacking along with storing cryptocurrencies of others falls on the exchanges plus the people who kept back their assets in the exchange’s, we cannot pay any attention to the fact that we live in a digital world where the majority people, as well as platforms, are not secure from hackers, that is to say, if the hacker actually wanted to make the cut.

3.
What are Decentralized exchanges?

It is an exchange market which does not depend on third-party services to hold one’s assets or funds. Now, trades are peer-to-peer, they take place directly amongst users, as well as the entire procedure is preset. To this point, there are two methods to get on with this. One technique is to make proxy tokens (an asset that corresponds to either cryptocurrency or fiat). In a different way, it is to utilize a decentralized multi-signature escrow method. This generates a trustless scheme, where one does not have to hand over their funds to any third party (like centralized exchange). When an individual makes a deposit of money on a centralized exchange, they are fundamentally issued an IOU, which they can afterward deal back for assets. But with a decentralized exchange, one is proficient to have power over of their funds, plus therefore be secure from hacking attacks. One more advantage is that there is no revelation of private details; one can make deals anonymously utilizing decentralized exchanges. These models are rather fresh, plus have yet to become accustomed to the functionalities of centralized exchanges which have been around for a long period. Users may consider centralized exchanges not so simple to make use of, as well as they will not have access to features such as stop loss and margin trading.

4.
Disadvantages of decentralized exchanges

Everything is not perfect, nonetheless. Peer-to-peer exchanges still have a few essential issues that can hinder their development in the future. Including their centralized infrastructure that depends on web servers to host the platform itself, where assets are not shared with Blockchain-based decentralized exchanges. Peer-to-peer exchanges are also not completely protected, as well as scams are inexorable. Malevolent players take advantage of the refundable payment technique with the intention to keep purchased coins, as well as the fiat, splurged on them. This same feature has also led some sellers in peer-to-peer markets to begin asking for ID authentication prior to making a deal, a less-than-finest practice when it comes to confidentiality and protection.

5.
Which one is better?

The likelihood is that you have grown up utilizing a central bank to hold your funds. The majority of the financial systems have been designed to work in a centralized method. That sounds somewhat uncanny that we have trust other people with our funds, but this financial system has been working fine in this method for many generations now. This is what makes cryptocurrencies such an innovative idea. For people to become their own banks is the predictable future. Possessing a digital wallet plus a decentralized exchange, which is used to trade directly with other people, totally cuts out the need of paying banks for this service.

Centralized exchanges possibly are simpler to use plus relevant to the current way of life, however, using a decentralized exchange will get you more accustomed to the idea of a decentralized financial system.
It can also authorize users to comprehend the idea of decentralization as well as how it will play a massive part in the future financial system.
 

6.
Winding Up

So, the issue still stands there. Can decentralized exchanges substitute peer-to-peer exchanges totally? From what has been observed from a long time, the status of P2P exchanges are not decreasing, as well as the benefits they give are not achievable at present by Blockchain-based DEX’s, at least by means of the technology currently existing. DEX’s may certainly turn out to be more popular amongst cryptocurrency users. On the other hand, we consider that P2P exchanges will be here a short time plus will possibly coexist with completely decentralized ones, though centralized trading platforms become wiped out, acting as a kind of middle ground or gateway to an entirely decentralized system.