What’s The Difference Between Centralized and Decentralized Exchanges?

If you are thinking about buying, selling, or otherwise investing in cryptocurrency, the first thing to do is visit an exchange and buy the cryptocurrency of your choice. Exchanges are digital marketplaces where cryptocurrencies are traded. The two main types of crypto exchanges are centralized and decentralized exchanges. While many people have heard about centralized exchanges, typically just called exchanges due to their ubiquitous nature, decentralized exchanges are less understood. This article will illuminate the differences between the two.

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Centralized Crypto Exchanges

A centralized cryptocurrency exchange relies on an intermediary or third-party account that helps monitor, facilitate and confirm all transactions are safe. Traders or investors deposit funds into these accounts and then use the funds to buy the cryptocurrency they would like to. These exchanges can also hold funds and crypto assets for some time to ensure they are safe.

Centralized exchanges require some form of verification before one starts trading and this is typically in the form of personal information. Verified traders enjoy various benefits over unverified traders.

Decentralized Crypto Exchanges

Decentralized crypto exchanges allow traders to buy and sell cryptocurrencies and other digital assets without an intermediary. Traders do not have to deposit funds into their accounts, with the exchanges using smart contracts, cross-chain swaps, and self-custody wallets to ensure exchanges go smoothly.

The main advantage of decentralized crypto exchanges is that they allow traders to complete trades, exchanges, or swaps cheaper and faster than their centralized counterparts. Multichain decentralized exchanges simplify the complex routes that exist between blockchains and that make exchanges more complex, slower, and costlier.

By allowing cross-chain swaps between various networks, decentralized exchanges like Alium Finance give you access to a wider pool of assets to buy, trade, and invest in. They also use aggregators that execute orders instantly and at the best prices, further taking full advantage of decentralized finance.

Solving a Serious Problem with Centralized Exchanges

Although decentralized exchanges solve many other shortcomings of centralized exchanges, they also solve the serious issue of liquidity. Liquidity on traditional cryptocurrency exchanges has typically been provided by trading firms and investors who had specialized tools and permissioned access to these blockchains.

This concentration of liquidity in such few hands is an issue because many of these investors and firms can pull out their money, which is providing liquidity, in case of volatility when prices rise rapidly. By doing so, they can restrict trades or withdrawals at a time when users need it most.

Decentralized exchanges have also adopted a hybrid liquidity model where they use liquidity data from both centralized and decentralized exchanges. By doing so, they give a fair price to everyone trading on their platform.

They also help protect their traders because a huge up or downsizing in either centralized or decentralized exchange liquidity is less likely to drastically impact the price of the assets exchanged and traded on their platforms.

Conclusion

Centralized and decentralized exchanges are all part of the same ecosystem allowing for the buying and selling of digital assets. There are differences between the two, and they can be significant enough to affect which of the two a trader chooses.

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