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Hot Topic: Centralized Exchanges v.s. Decentralized Exchanges

Centralized Exchanges Some of the top centralized exchanges

These are the big names almost every crypto trader knows and trades on. In a centralized exchange, a trader deposits fiat or crypto into their exchange account in order to “buy” the different coins offered on the exchange. I say “buy” because the trader does not actually own the underlying coins until they transfer the coins out of the exchange. The centralized exchange acts as the bank for your trading account by holding all the coins until an investor wants to pull them out. Although this process doesn’t quite fit with the decentralized ideologies of cryptocurrency, it has proven to be the most efficient way to trade crypto:

Centralized exchanges make up about 99% of crypto trading volume.

The drawbacks of a centralized exchange is the vulnerability to hacking. A bad actor who hacks the exchange can run off with your crypto since its stored on the exchange and not in your wallet. There have been notable centralized exchange hacks amounting to over $500 mil in the past few years. Thats not very comforting, but for 99% of traders they’re willing to take that risk.

Decentralized Exchanges (DEX)

This is where things get interesting. DEX utilize smart contracts to execute trades and users hold their coins in their own wallets. DEX are open-source and much more resilient than centralized exchanges to hacking. There is more privacy in DEX trading because normally traders do not need to even make an account with the DEX. Right now, some disadvantages of DEX are less liquidity, complicated to get started (especially for beginners in crypto), and less coins offered.

We like what our friends over at Totle are doing to make DEX more consumer-friendly.

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