Blockchain and Cryptocurrency Beginner - Decentralized and Centralized Exchanges and the Differences

Decentralized exchange

A decentralized exchange is basically an exchange that gives users full control of their funds and how users exchange tokens. This means that, it runs on the blockchain and there is no depositing and withdrawals like in the centralized exchanges, there is no order books, instead users connect their wallet on the decentralized exchange protocol and swap their tokens on a peer-to-peer basis, based on the provided liquidity and price. On a decentralized exchange, there is no central entity or authority that controls what happens on the exchange, instead, everything is done in a decentralized manner.

Over the past few months, we have seen the rise of DeFi and in the world of DeFi, decentralized exchanges are a huge aspect of DeFi. The past months have seen the massive increase in decentralized exchange usage such as uniswap and pancakeswap. Uniswap has enjoyed a large share when it comes to decentralized exchange usage and has gone on to become one of the most used decentralized exchanges. Also, with a lot of projects springing up on the binance smart chain recently, there is even more interest in the use of decentralized exchange like pancake swap.

Centralized exchange

A centralized exchange is the complete opposite of a decentralized exchange. A centralized exchange is basically the most popular type of crypto exchanges used by many… It is an exchange that is controlled by a central entity. In a centralized exchange, all user funds are in custody of the centralized exchange entity since users need to deposit their funds or assets into the exchange accounts before being able to trade.

A centralized exchange has an order book containing a list of buy or sell orders. Users place buy or sell orders and wait for it to get filled depending on the price of the asset on the order book and the volume. At the moment, there are a number of top centralized exchanges like Binance, Coinbase, kucoin, Huobi, OKEx, Hotbit, etc.

Difference Between Decentralization and Centralization Exchanges

Decentralized Exchange	Centralized Exchange
Users have full control of their assets in their wallets	Centralized exchanges have full control of user assets
Non-Custodial	Custodial
Runs on the blockchain	Runs on a server
No downtime	There are Downtimes
Relies liquidity providers	Relies on order books
Peer-to-peer transaction	Centralized exchanges serve as intermediaries between buyers and sellers
Cannot be hacked	Can be hacked
No account creation	Account creation required
No KYC required	Some centralized exchanges require KYC before performing deposits and withdrawals
Requires a bit of technical knowledge	No technical knowledge required