While trading on a decentralized exchange might sound fancy it isn’t like they don’t have any disadvantages. While Cryptocurrency exchanges play a crucial role in the adoption of Blockchain-based projects, not all exchanges are the same. Broadly speaking, they are divided into Centralized exchanges, decentralized exchanges, and hybrid exchanges.
As More people start exploring Blockchain-based asset classes, it’s important to understand the fundamental difference between these along with the pros and cons.
Pros and Cons of Centralized Exchanges (ie, Binance, WazirX, etc.)
We can’t deny that Centralized Exchanges are actually the first place where new investors start their journey with Cryptocurrency. It’s simply easy for new folks to get started with a streamlined and easy-to-use interface. These exchanges help people like you and me connect with the biggest projects out there in the wild by minimal fees and high liquidity. That brings me to discuss its advantages and disadvantages with you all.
Advantages of Centralized Exchanges
- High Liquidity.
- Massive Trading Volumes.
- Fast Transaction Speeds.
- Less Fees in Gas Costs.
Disadvantages of Centralized Exchanges
- No access to Wallet Private Keys. Without Private keys, you don’t fully control your money.
- Security Concerns since these exchanges are a primary target for hackers. Some of the recent hacks were aimed at Mt. Gox, Bitfinex, Coincheck, etc.
- Price and Order Book Manipulation. Often we can find that prices are slightly manipulated than normal market prices outside the exchange.
Advantages and Disadvantages of Decentralized Exchanges
These exchanges work in a different manner in terms of technology, security, trustlessness and more. However, they aim to share the same goal of resolving the flaws which can be seen in Centralized Exchanges.
Advantages of a DEX
- You don’t have to compromise with your Wallet Private Keys to trade.
- Most of the DEX’s use some form of distributed hosting which minimises the risk of infiltration and attacks,
- If you have your own project and want to get it listed on a DEX, the fees would be much less when compared with a Centralised Exchange.
Disadvantages of a DEX
On-Chain/Off-Chain Order Books
The earliest DEX’s took the term more literally by building fully on-chain models in which all orders interact directly with each other. While this does achieve an extensive level of decentralization, it makes each and every transaction expensive and slow. Not to ignore, each transaction on a DEX involves a transaction fee and the faster you want to get it done, the more you have to pay.
Apart from these, you might face trade failures since blockchain reflects only those transactions after they have been mined, there are many times where a limit order is both visible on the order books and pending execution and settlement.
Also, users cannot create complex orders that rely on assistance from a third party such as setting up a stop loss.
Lastly, it all comes down to personal preferences. If you like to trade on a DEX, because of its privacy features and expensive transaction costs, you should trade there. However, for most users, trading on a Centralised Exchange is the way to go because of faster Customer Support, Complex Order Placing, fewer Fees, and tons of other benefits.