Should You Use a Decentralized Cryptocurrency Exchange?

Choosing a good exchange is almost as important as choosing a cryptocurrency to invest in. The exchange facilitates your trade, and if a platform is inadequate or untrustworthy then your investments could suffer greatly.

If you choose an untrustworthy exchange then you might never even get your assets to start with! There are more or less two types of exchanges, and in this article, we’ll be discussing when you might consider using each kind. These are centralized and decentralized exchanges.

We’ll start off this article by defining what each of these options is and giving some examples of popular crypto exchanges in each category. Then we’ll talk about why you might choose one or the other to help you come to a decision about what type of platform you would be most comfortable trading on. Okay then, let’s get started.

What is a centralized exchange?

A centralized trading platform is a cryptocurrency service that is more or less controlled by one entity. Often this requires a central point of failure, and if the platform runs into legal complications they can be shut down or have certain regulations forced upon them. Most of these exchanges will require their users to submit to lengthy financial verification procedures due to their own responsibility to their local governing bodies.

This is most apparent for investors in the US due to the overwhelming regulation that is required by banks or any financial application. This doesn’t exactly jive with the original goal of cryptocurrency, which was to be free from these institutions, but it’s how things work for now.

There are however some benefits to using a centralized option. For starters, they tend to hold the highest level of trading volume. This is because they are typically companies with a large marketing budget to attract traders, and they also tend to be more trusted.

Many investors with a large bankroll don’t want to just put their money any old place, and a company that has real accountability for what they do with your money is generally their first stop.

By controlling much of the liquidity they actually attract even more traders to their service. This is because that’s where the money is and traders want to make money. Higher trading volume means more opportunities for trades with faster-moving markets and more profit.

Centralized exchanges also tend to be much faster than their DEX counterparts, and the ability to execute trades quickly is important to day traders. That is how they make their money after all, and if they spend all their time waiting around for confirmations then they will likely miss out on their very tiny profit window.

However, that does not mean that these investors are actually happy with centralized exchanges. In fact, many have voiced their disapproval of the way their funds are handled and the increase in fees that some players have been making. They just more or less put up with it for the benefits talked about above.

There have also been numerous instances where unsavory Website owners running these operations have taken off with trader’s funds. Whether this from direct theft or seizure from a governing body, the fact is that when a centralized platform has your money it is no longer yours, and they can do whatever they want with it.

Who might want to use a centralized exchange?

If you fit the below profiles then you may consider using this type of platform for your day to day trading activities.

  • Day traders
  • High volume traders
  • People who need trades executed quickly
  • People who are more comfortable with a company managing their money

What is a decentralized exchange?

When someone is talking about a cryptocurrency decentralized exchange they are typically talking about a trading platform which is distributed. This means that it does not have a central point of failure which can be shut down.

Not only does this protect the platform from attackers, but it also makes it extremely difficult for this option to be regulated, because there’s no company to shut down. Many of these operate in a peer to peer based environment that facilitates this functionality.

For privacy advocates and crypto enthusiasts, this presents a welcome change to the centralized platform ecosystem. A DEX typically comes with a real cryptocurrency wallet that you control, and that means no governing bodies or even the owners themselves can freeze your funds for any reason.

This also means that there is no verification procedure and no one is excluded from trading based on their location. This is extremely helpful to anyone who may have a difficult time registering a trading account based on their home country which may restrict or ban access to cryptocurrencies.

The fees for these types of setups also tend to be much more attractive, because the infrastructure to run them is cheaper. This means the exchange can pass these savings on to the traders.

There are however some downsides to using a DEX. The first being that despite the nature of cryptocurrencies, it has been very hard for a decentralized option to actually get off the ground. While there are several of them around, the trading volume remains painfully low, and it’s difficult to get people to actually use them. This is likely a chicken and egg type of scenario where you need traders to get transaction volume, but you also need transaction volume to get traders.

Due to this problem, it remains challenging to get people to make the switch. DEX’s also seem to suffer from a lack of speed, which is one of the biggest downsides to being decentralized. People making financial decisions where a second could cost them thousands of dollars do not want to use an exchange that can’t keep up.

This is, unfortunately, a big problem that DEX’s are still trying to solve. There are some solutions on the horizon which may clear this up, including liquidity pools which would allow them to easily share their trading volume and options which promise to be much faster. For now, however, centralized options are winning on this front.

Who might want to use a DEX?

If you fit the below profiles then you may consider using this type of platform for your day to day investing activities.

  • Those who are concerned with privacy.
  • People who want complete control of their funds.
  • Investors looking to buy more obscure assets.
  • Traders looking for lower transaction fees.

Should I use a DEX or a centralized crypto exchange?

When deciding what type of platform to use you need to look at your usage. If you are primarily focused on day trading and trying to pick up small bits of money from slight price variations in assets, then you need a high volume option with swift transaction speed. In this case, a centralized platform is likely your only option. Many DEXs simply are capable of providing this. The transactions will be too slow, and the market’s volume will prove inadequate.

If privacy and control of your own assets is your biggest focus, then you will likely want to pursue a decentralized trading option. These exchanges offer protection of privacy and control of your funds that no centralized option can match. The transaction volume on these exchanges is often just fine for doing one-off trades on a regular basis, and you’ll do just fine buying your coins or tokens here.

Are you looking for an exchange that offers a wide variety of assets? A DEX is likely the best choice. These exchanges are typically the very first to list brand new coins or tokens, and you stand to make some decent money if you can get in on them before they make it to larger, centralized options where the big volume is.

In closing, when choosing an exchange it’s important to know all the facts. Before transferring any money to these exchanges you should make sure that you’re familiar with all of the rules of the website and have properly identified your specific needs. If you need a little help in choosing an exchange, then also now offers an exchange ratings page!

Using this page you can quickly evaluate the exchanges that you are considering based on aggregated data. This can help you to choose the safest exchanges and even filter them based on certain criteria. This is an easy way to compare different exchanges at a glance.