What are Cryptocurrency Exchanges?
Cryptocurrency exchanges allow investors to trade digital currencies like Bitcoin. While many people are familiar with stock exchanges, cryptocurrency exchanges are newer concepts. In 2010 Gavin Anderson created a Bitcoin “faucet,” a website that distributed free Bitcoin. Soon after that, cryptocurrency exchanges like Bitcoin Market and Mt. Gox were launched to the public.
What are Centralized Exchanges?
Centralized exchanges act as a third party between buyers and sellers. Some notable centralized exchanges are Coinbase, Binance, Kraken, Kucoin, and Gemini are notable centralized exchanges. Centralized exchanges account for roughly 90% of all cryptocurrency transactions. Most transactions are done on centralized exchanges because of their user-friendly interfaces, which allow even the newest users to start investing quickly. The reliability of centralized exchanges is often a reason for their high transaction percentages, and centralized exchanges expedite transactions through developed and centralized platforms similar to stock exchanges.
While Centralized Exchanges have many advantages, they also have disadvantages. Transaction fees and susceptibility to hacking are two of the main disadvantages of centralized exchanges. Since companies are responsible for users' cryptocurrency transactions, they are susceptible to hacking. In 2016 Bitfinex, a centralized exchange owned by iFinex Inc was hacked, and over 120,000 Bitcoin was stolen.
What are Decentralized Exchanges?
Decentralized exchanges allow for peer-to-peer transactions without the need for third parties or companies to facilitate trades. Some notable decentralized exchanges are Uniswap, Spookyswap, TraderJoeXYZ, and Sushiswap. While decentralized exchanges only account for roughly 10% of all cryptocurrency transactions, they offer many advantages. Decentralized exchanges allow for anonymity and complete privacy, unlike centralized exchanges, which require users to submit personal details and KYC or know your customer details before opening an account.
Decentralized Exchanges are a good alternative for users concerned with the risks of being hacked. Decentralized exchanges do not take custody of users' cryptocurrencies, and trades are initiated through the use of a smart contract. Truly decentralized exchanges do not have a centralized company or entity that holds users' funds, so the risk of being hacked is minimized. Decentralized exchanges also allow users to trade a wider variety of cryptocurrencies not available on centralized exchanges.
One disadvantage of decentralized exchanges is that they do not allow the trading of fiat currencies or cash for cryptocurrencies. Unlike centralized exchanges, decentralized exchanges only allow users to trade cryptocurrencies for other cryptocurrencies. If a user with fiat currency or cash wants to buy a cryptocurrency that is only on a decentralized exchange, this can become an extensive process. First, the user would trade cash for a cryptocurrency on a centralized exchange. Next, they would send the cryptocurrency to a crypto wallet. Then exchange that cryptocurrency for the preferred cryptocurrency on the decentralized exchange.
Another disadvantage of decentralized exchanges is the complexity. Decentralized exchanges require users to become familiar with a more complex trading process. A company or entity does not own decentralized exchanges, so tech support can not be contacted if a user makes a mistake.
Both centralized exchanges and decentralized exchanges have their advantages and disadvantages. Both of these methods will allow you to trade and invest in cryptocurrencies no matter your preference