Centralized or Decentralized Crypto Exchanges: Which is Better?

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All crypto exchanges vary, but there are two main categories they fall into: centralized and decentralized. But what is the difference between centralized and decentralized crypto exchanges, and which is better for you?

How secure are centralized and decentralized crypto exchanges?

Although there are many factors to consider when choosing a crypto exchange, security should come first. After all, crypto exchanges manage your funds, so you want to be sure that they are protected to the highest degree.

So how do centralized and decentralized exchanges differ in their security integrity? Is one safer than the other?

Let’s start with centralized exchanges (CEX).

The security of centralized exchanges Image Credit: sdx15/Shutterstock

Binance, Coinbase, and Kraken are all popular examples of centralized crypto exchanges. These platforms come with fantastic security features, such as:

Two-factor authentication Login alerts Cold rooms Address whitelisting Withdrawal confirmations Multi-approval withdrawals KYC (Know Your Customer) and AML (Anti-Money Laundering) protocols

Note that centralized crypto exchanges offer custodial wallets, which means you entrust your private keys to the exchange. Some see it as a benefit, while others think it’s a security risk.

Most reputable centralized exchanges are safe to use (although no platform is 100% secure). But there’s a glaring problem here, and that’s the centralized structure they adopt. A centralized crypto exchange is built in a way that gives one central entity control of the entire platform. Platforms like Facebook, Instagram and Twitter are centralized. Although a centralized model is not inherently bad, it does have several weak points.

First, centralized exchanges use a centralized data storage model. In other words, one or a few data centers store the platform information. If one of these data centers is hacked, a lot of sensitive information could be accessed.

Additionally, using centralized servers also increases the chances of outages and other issues, as there is a single central point of failure that can be exploited. For example, if a central server were infected with malware or hacked, it could bring down the entire platform. Centralized platforms are also more susceptible to widespread technical faults due to their structure.

So how do decentralized exchanges (DEX) compare?

The security of decentralized exchanges

Decentralized crypto exchanges can also offer useful security features, such as:

KYC verification. Intelligent contract verification. Multi-signature transactions. Open source code. Non-custodial portfolios.

Decentralized exchanges can avoid many of the weak points that centralized platforms suffer from. For example, a decentralized exchange distributes all data and power across multiple connection points, called nodes. This forms a network of devices that all contribute to the network.

A decentralized structure makes it difficult for a malicious actor to launch an attack. If a node is hacked, it can be shut down, leaving all other nodes to operate as normal. Even if 50% of all nodes are hacked, which is very tricky to achieve, the attacker still cannot take control of the whole platform (but this becomes a serious threat at 51%!) . Spreading data and power in this way eliminates single points of failure and makes decentralized exchanges resilient to certain types of attacks.

Decentralized exchange users can have a say in developments and decisions via governance.

Governance involves users offering tokens to vote on disputes or proposals. This gives the community power over the platform, avoiding decisions being made by a single group of powerful individuals.

Financial risks

Both centralized and decentralized exchanges have financial risks that you should be aware of before trading or investing.

For starters, decentralized and centralized exchanges deal in many of the same cryptocurrencies. Many of these assets are highly volatile, meaning they are subject to constant price fluctuations. This is not the fault of the exchange itself, but it is the nature of the crypto industry.

Whether you use a centralized or decentralized crypto exchange, asset price crashes can lead to financial losses. If you buy Crypto A at $5 apiece and the price halves, you will not be able to make a profit via the sell until the price recovers.

Both types of exchanges can also experience liquidity issues, which in severe cases can prevent you from accessing or withdrawing your deposited funds.

Are decentralized exchanges cheaper to use?

So we’ve established that decentralized crypto exchanges are generally more secure, but what kinds of costs are you going to incur here?

Overall, decentralized exchanges are cheaper than their centralized contemporaries.

This is partly because decentralized exchanges are largely automated and do not require the presence of intermediaries and third parties. The use of smart contracts also allows decentralized exchanges to automatically execute transactions without requiring human intervention. This leads to a reduction in overhead, which allows decentralized exchanges to charge their users lower fees.

For example, dYdX users incur a maker fee of 0.02% and a taker fee of 0.05%. Curve Finance, on the other hand, charges a 0.04% swap fee for Ethereum-based trades and a 0.1% fee for Polygon-based trades. Note that some DEXs charge a little more than this, such as Uniswap, with its 0.3% trading fee. However, there are super affordable centralized exchanges today. Binance, for example, charges a 0.1% subordinate maker and taker fee, as do Kucoin and Bitfinex.

But many other centralized changes take a bigger cut. Coinbase Pro, for example, charges a maker and taker fee of 0.5%, while Bittrex charges a maker and taker fee of 0.75%.

Which type of crypto exchange has more features? Image Credit: SimpleFX/Flickr

The answer to this question will vary depending on the exchange you are using. Some exchanges are feature-rich, while others keep things simple.

Binance, for example, is probably one of the most feature-dense centralized exchanges. Coinbase and Kraken also have a lot to offer. But other centralized exchanges, like Bitfinex and eToro, are more limited in what they offer.

On the other hand, decentralized exchanges cannot offer features that require a centralized structure, such as crypto payment cards, custodial wallets, and off-chain staking.

You can expect to find exchanges, swaps, NFTs, and stakes on centralized and decentralized exchanges.

You can also access an array of decentralized applications (DApps) on decentralized exchanges. So, if you like using DApps, a decentralized exchange will suit you better.

Using Centralized and Decentralized Crypto Exchanges

Almost all centralized exchanges have simple user interfaces where you can easily navigate from page to page without being a crypto veteran. Centralized exchanges are great for beginners and often have how-to sections and blog posts to help you understand how everything works.

If you are new to crypto or not tech-savvy, you may find decentralized exchanges difficult. Some decentralized exchanges can be overwhelming, with walls of stats, order books, and charts. For beginners, this can be a big problem.

But this is not the case everywhere. Many newer and more popular decentralized exchanges, such as Uniswap, have worked to make their interface easier on the eyes and easier to understand. So do not neglect this option before checking the interface of your desired decentralized exchange.

DEXs and CEXs bring advantages and disadvantages

Neither DEXs nor CEXs are perfect, and neither stands out as the worst option. Deciding which type of exchange to use depends on your preferences.

If you are looking for high security above all else, DEXs might be better. If, however, you want lots of features and a simple interface, you can opt for a CEX. What you need to make sure, above all else, is that the platform you are interested in is safe and legit.

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