Cryptocurrency exchanges play a key role in the cryptocurrency market, as they are the primary means of exchange in a market valued at over $450 billion. There are two types of cryptocurrency exchanges: centralised exchanges and decentralised exchanges.
A centralised exchange is one where deposits, withdrawals, and the order book, are controlled by one party, which is the exchange. Simply put, the exchange holds depositors’ funds and a record of buy and sell transactions. Examples of centralized exchange include Luno and Binance.
In a decentralised exchange, there are no middle parties. Transactions are directly between each user. Examples of decentralised exchanges include EtherDelta and Idex.
Advantages of a centralised exchange
Centralised exchanges are easier to use. Most centralised exchanges require an email address, password, and username. They also have a wider variety of coins one can pick from.
Disadvantages of a centralised exchange
Centralised exchanges are prone to hacking since they hold users’ funds. A large proportion of the exchanges that have recently been hacked are centralised.
Centralised exchanges also store users’ records which denies them true anonymity, as they can easily be traced through their emails and identification cards. In some cases, the exchanges hand over this data to the government or regulators.
Also, users have to rely on the exchange to authenticate transactions.
Advantages of a decentralised exchange
Decentralised exchanges are much more difficult to hack since information is spread across different servers. Funds are also held by the users, which lessens the risk of hacking.
Disadvantages of a decentralised exchange
Decentralised exchanges are often difficult to use. This is largely due to the mode of authentication using public and private keys. In the event of the private key being lost, users in many cases will have no access to their funds, as not even the exchange has access to them.
Difficulty in using such exchanges means that they have fewer users. Coins that are not listed on any other exchange tend to do quite poorly in terms of price. For the average investor, a price increase is the most important reason for holding cryptocurrencies. This is only possible with frequent trading.