Cryptocurrency Exchanges: Decentralized vs. Centralized
By ICO Alert
Decentralization eliminates third-party risk while increasing security and transparency
Centralized exchanges provide ease-of-use, liquidity, and convenience
Decentralized digital asset exchanges are increasing in popularity due to the long list of issues that cryptocurrency users have been faced with when trading on centralized platforms. Exchange hacks, lengthy KYC processes, and unmerited account closures are some of the challenges that crypto traders have had to deal with on centralized exchanges, which is resulting in more and more investors moving towards the decentralized alternative to execute their trades.
Why This Matters: The decentralized nature of cryptocurrency networks is one of their main advantages over fiat currency. Decentralization eliminates third-party risk and the need for a financial intermediary. It also increases security and transparency as there is no single point of failure in the network and all financial transactions can be viewed on a public ledger.
Most cryptocurrency exchanges, however, are centralized operations. That means they carry a range of risks for users that could lead to a loss of funds such as an exchange hacks, financial mismanagement of the exchange operators that results in bankruptcy, operational errors by employees, and unexpected account closures or freezes. Unfortunately, these are not just theoretical risk but issues that have occurred for thousands of crypto investors in the past.
Leading digital currency exchanges Poloniex, Bitstamp, LocalBitcoins, and Bitfinex have all been hacked. The largest hack of a centralized cryptocurrency exchange took place in January 2018 when Coincheck had $530 million worth of NEM (XEM) stolen from its platform.
A decentralized cryptocurrency exchange, also known as a DEX, is a trading platform that does not hold investor funds. Instead, digital asset trades occur directly between the two transacting parties on a peer-to-peer basis and are settled on the blockchain.
Decentralized exchanges provide a degree of anonymity and personal financial sovereignty to traders. As transactions are executed on a distributed ledger directly and there is no need for sign up documentation or identity authentication to use the platform.
Situational Awareness: While decentralized exchanges are on the rise, it is unlikely that centralized exchanges will disappear. For the time being, crypto investors are still content with taking on the risks of dealing on centralized exchanges in exchange for ease-of-use, liquidity, and convenience.
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