Various Types Of Decentralized Crypto Exchanges
Exchanges play a considerable role in the crypto industry because with their help, and you can buy cryptocurrencies, exchange them for fiat currencies, and make money on currency fluctuations. Today there are several varieties, but many are interested in better: centralized exchange vs decentralized exchange? The answer will allow you to achieve the most effective result, and it depends on the goals you are pursuing.
Cryptocurrency exchanges: main varieties
The first currency exchanges appeared in the Netherlands in the 60s of the last century. Since then, businesses have appeared in almost all countries all over the world. They offer millions of people to make money on currency fluctuations. Financial flair and a stock of knowledge help people make a fortune on classic exchanges.
Platforms still use fiat currencies and continue to evolve, attract a lot of public attention. Cryptocurrency exchanges are a relatively new phenomenon that occurred in 2010 and are already very popular. Its creator was Gavin Anderson, who created a unique site engaged in the free distribution of bitcoins. There are three main types of cryptocurrency exchanges:
Let's learn more about these three varieties, consider their principles of work.
Centralized crypto exchanges (CEX) are among the most straightforward and most understandable types of conversations that work similarly to other fiat currency exchanges. Here it is an intermediary between the owners and buyers of the cryptocurrency or tokens.
CEX is centralized as it is owned by a specific company that profits from such operations. It is pretty easy to use, does not require much knowledge to get started, has a good UI and UX. Anyone ready to take a risk and start trading on the exchange using cryptocurrencies can find all the necessary data, statistical information, and reviews here.
To get started, you need to go through a simple registration, come up with a login and password, and you can perform various operations with cryptocurrencies. Also, if you have any problems, you can contact support. Here they will answer all questions and show you how to solve many questions. This service is often beneficial.
Among the main benefits of centralized crypto exchanges are:
- Ease of use;
- Massive selection of cryptocurrencies.
Coinbase and GDAX are among the most famous centralized exchange crypto. They have been in the market for a long time, have an excellent reputation, and have good liquidity. Here you will get good conditions for cooperation.
As for the disadvantages, users notice that they are more likely to be attacked by hackers. For example, Mt. Gox underwent a massive hack in 2014. As a result of the hack, scammers scrounged 850,000 bitcoins worth more than 460 million USD. The exchange filed for bankruptcy after the hack. And there are many such examples.
The next disadvantage is that they charge a transaction fee of 0.012% to 0.1%. At high turnovers, such a commission can severely hit the seller's wallet. Many companies focus on cryptocurrencies to minimize the payment of commissions to banks for international transactions. And such exchanges can be frightening due to tremendous contributions.
In general, such exchanges are top-rated, as they are easy to use, have a vast number of currencies and offer good conditions for cooperation.
Decentralized exchanges (DEX) are an excellent alternative to CEX. They have a completely different work technology. The decentralized trading platform is an unusual exchange that uses peer-to-peer transactions without a third party.
Among the benefits of decentralized cryptocurrency exchanges are:
- Anonymity - users do not need to provide personal data, and everything is entirely anonymous here, you don't have to worry about your private information;
- No risk. The main advantage of such exchanges is that you can be confident in the safety of your assets. They work in such a way that the likelihood of hacker attacks is reduced to zero. Everything here is transparent but protected, as in the best traditions of blockchain technology. Uses smart contract technology that prevents any system hacks, including with the help of ransomware.
- No market manipulation - owners often create artificial manipulations to increase demand for various currencies to gain additional profit in centralized markets.
Some of the examples of DEX that deserve your attention are Uniswap (V2), Tokenlon, 0x protocol, and Venus. With their help, you can get the maximum security of your assets.
Since Ethereum is the most reliable blockchain, and many decentralized exchanges work on its basis. It allows the full use of smart contracts.
The advantage of DEX is that government agencies cannot close them, as they do not belong to anyone. Also, no one can stop or block transactions. Everything is as safe as possible here.
Despite all the advantages, DEX has several significant disadvantages:
- low trading volume,
- little liquidity,
- low transaction speed;
- poor UI.
As a result, due to all these shortcomings, customers feel that it is much more challenging to manage such exchanges than centralized exchanges.
Comparing centralized vs decentralized exchange, the developers have created a new unique option - hybrid exchanges. They combine all the advantages of both sides. So, all transactions are fast enough, have good security, and you are the sole owner of your key.
Today this type of cryptocurrency exchange is in development. Today there are a limited number of businesses that use this technology. Among the most famous are Nash and Qurrex. They have appeared relatively recently but have already attracted the attention of many users.
Legal regulation of exchanges
Centralized vs decentralized cryptocurrency exchanges have different types of law and licensing. In some countries, such as China, South Korea, India, and Russia, CEX is subject to government regulation. So, they must comply with the laws of their region.
DEX activities do not require state registration. It allows you to solve a lot of problems, but at the same time, if any questions or issues arise, clients will not be able to count on protection from the authorities.
Four main types of decentralized exchanges
Interest in decentralized cryptocurrency exchanges is overgrowing, as evidenced by the growth of financial turnover several times.
So, there are four main types of decentralized exchanges:
- DEX with the automatic market maker (AMM);
- Backup system DEX;
- Peer-to-peer DEX;
- Parallel DEX processing.
DEX, which is based on market makers, is managed by smart contracts. This type of exchange receives liquidity from LPs who place their assets in a pool. Among the most popular cryptocurrency exchanges that operate the AMM protocol are Uniswap, Balancer, and Curve. They are launching such deals that cost a little more than centralized exchanges.
DEX backup systems work in a similar way to AMM decentralized exchanges. AMM DEXs are usually subject to volatile IP losses due to price fluctuations. It means that when large trades are made on the DEX, the slippage is considerable. To solve this problem, the developers have introduced redundant systems that support the ERC-20 standard. It allows for risk management and better price control.
It is also known as an order matching system as it allows counterparties to trade in a peer-to-peer environment. Counterparties can trade directly from their wallets.
Each of them has its characteristics. For example, some of the latest and greatest Atomic DEXs are designed to operate as a non-storage and permissionless platform. They allow for settlements in the chain and user and order book with the market for payment on a deal.
Parallel processing DEX uses UTXO based blockchain. Traders use smart contracts that are not similar to those used in the previous varieties. A multi-reserve currency is a reserve that is often used as a pool of liquidity. The advantages of this model are that AMMs process transactions in sequence, while DEXs in parallel process multiple transactions simultaneously. Several trades are placed in a block and then sent for processing. It increases the speed of transactions, reduces risk, and allows you to use liquidity effectively.
When choosing a decentralized exchange, you need to consider the following points:
- the number of cryptocurrencies they use;
- are there any restrictions on transactions (minimum and maximum amounts);
- level of protection;
Before you start working with the exchange, you need to read reviews, learn about all the advantages and disadvantages of the platform. When reading reviews, you should trust only trusted sources and forums. You can also get opinions about exchanges from people who are already trading.
If you cannot choose CEX or DEX, you need to make a comparison of all the advantages and disadvantages of both exchanges. If you value comfort and want to use a considerable number of currencies, have good liquidity, then centralized cryptocurrency exchanges are better for you.
If security, anonymity, and the absence of exchange manipulations play a huge role for you, then decentralized exchanges will be a good solution. In addition, they are not subject to control by the authorities, which helps prevent blockages. The above exchanges deserve your attention and have proven that their creators are professionals in their field.