Centralized exchanges (CEX)

A centralized exchange functions much like traditional brokerages or stock markets. The exchange is run with a centralized authority that maintains complete treatments for every account and those account’s transactions. All transactions on a centralized exchange has to be approved by the exchange; this requires that most users place their have confidence in an exchange operators’ hands.

Advantages

Liquidity: Liquidity of the asset describes being able to be sold without causing much price movement and minimum loss in value. Liquidity is essential for the utmost safety against market manipulation, like coordinated “pump-and-dump” schemes. Centralized exchanges are acknowledged to have greater liquidity kinds of exchanges.

Recovery possible: Most centralized exchanges provide the advantage of having the ability to verify a users’ identity and recover access to their digital assets, if the user lose or misplace their login credentials.

Speed: Transaction speed matters for many kinds of cryptocurrency traders; it’s very important in high-frequency trading, where milliseconds count. According to an analysis by bitcoin.com, compared to other exchanges, centralized exchanges handle transactions faster, with the average speed of 10 milliseconds.

Disadvantages

Honeypot for hackers: Centralized exchanges are accountable for billions of trades per day and store valuable user data across centralized servers. Hackers prefer them over other types of cryptocurrency trading platforms for this reason alone – probably the most notorious hacks are already aimed at centralized exchanges, including Mt.GoX, BitFinex, and Cryptopia.

Manipulation: Certain centralized exchanges are already accused of manipulating trading volume, taking part in insider trading, and performing other acts of price manipulation.

Decentralized Exchanges (DEX)

Unlike centralized exchanges, decentralized exchanges (also known as a DEX) become autonomous decentralized applications running on public distributed ledger infrastructure. They permit participants to trade cryptocurrency with out a central authority.

Centralized exchanges tend to be only at participants within certain jurisdictions, require licensing, and enquire of participants to verify their identity (KYC: “know your customer”). In comparison, decentralized exchanges are fully autonomous, anonymous, and lacking the same requirements. Several decentralized exchanges exist today, which we could categorize into three types: on-chain order books, off-chain order books, and automatic market makers.

Advantages

Custody: There is a famous saying in distributed ledger communities, “Not your keys, not your crypto.”: digital assets and cryptocurrencies belong to whoever possesses the keys to a forex account that holds those digital assets. As DEXs are decentralized, no single entity owns them, users control their private keys along with their digital assets.

Security and privacy: Since users are not needed to go through KYC to make a merchant account over a decentralized exchange, users can be much more confident that their privacy is preserved. Regarding security, most DEXs employ distributed hosting and take other security precautions, thereby minimizing the chance of attack and infiltration.

Trustless: A users’ funds and personal data are under their own control, as nobody except the users has access to that information.

Disadvantages

Low liquidity: Even top decentralized exchanges battle with liquidity for many digital assets – lower liquidity makes it easier to govern markets with a decentralized exchange.

Blockchain interoperability: Trading or swapping two digital assets that exist on a single distributed ledger can be a not at all hard procedure using a DEX; trading two digital assets available on two different distributed ledgers can be incredibly challenging and require additional software or networks.

Hybrid Exchanges

A hybrid exchange combines the strengths of both centralized and decentralized exchanges. It facilitates the centralized matching of orders and decentralized storage of tokens – this implies a hybrid exchange cannot control a users’ assets and possesses no chance to avoid someone from withdrawing funds. Simultaneously, a quick centralized database manages order information and matching trades as an alternative to using potentially slow blockchain infrastructure.

Advantages

Closed ecosystem: A hybrid exchange can be employed in a closed ecosystem. Organizations can be assured in the privacy of the information while benefiting from blockchain technology.

Privacy: Private blockchains are primarily employed for privacy-related use cases in exchange for limiting communication with all the public. A hybrid exchange can look after a company’s privacy while still and can contact shareholders.

Disadvantages

Low Volume: Hybrid exchanges simply have been known for a while. They just don’t yet possess the necessary volume to get go-to platforms for choosing and selling digital assets. Low volume means they are an easy target for price manipulation.

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