Decentralized Exchanges vs Centralized: Which Is Safer?

One of the initial questions that comes to the minds of people when they speak about cryptocurrency is how to buy, sell, and exchange coins. As a way of doing this, there are two chief platforms; centralized exchanges (CEXs) and decentralized exchanges (DEXs). The two are significant in the crypto market and the question people always pose is which of the two is safer? Being a Nigerian, the question of safety in connection with financial issues is highly important as we have observed numerous cases of fraud, scam and unsuccessful financial systems.

Centralized exchanges refer to the platforms that are managed either by an authority or a company. A couple of popular ones are Binance, Coinbase and KuCoin. The exchanges constitute an intermediary between the seller to the buyer. In case you need to purchase Bitcoin, you transmit funds to the exchange, and they are giving you Bitcoin. They assist you to sell and draw your money in case you wish to sell.

The one thing regarding centralized exchanges is that you have to trust the company. They have your cash, your own information and even your confidential information such as ID cards in case of verification (KYC). It is what a usual bank would feel like due to the fact that you do not have absolute control of your assets.

The Binance is also simple and supports P2P trading in Nigeria. It is true that centralizes exchanges are easy to use. They have customer services, mobile applications that are easy to use and sometimes even they provide insurance covers on stolen cash.

The decentralized exchanges work, however, differently. They do not have a corporation or intermediary who is heading them. Rather, they employ the blockchain technology and smart contracts to bridge the gap between buyers and sellers. Uniswap, PancakeSwap, and SushiSwap are some of the examples of DEXs.

Here, it is you who is master of your money. You do not need to send the exchange your money. All you do is just to connect your crypto wallet, trade directly and store your funds safe in your pocket. Your money is not anywhere in the custody of anybody. That is why quite a lot of people say: Not your keys, not your coins.

To Nigerians that are wary of being scammed and hacked a DEX may be seen as safer as you are not relying on a company. Rather you are taking the word of the code and the technology concerning it.

And now is the main question: how safe it is? Do centralized exchanges offer safety? There are advantages and disadvantages to centralized exchanges. They shell a lot in order to secure since they are big companies. They employ technologically improved packaging such as two-factor authentication (2FA), encryption, and anti-hacking methods. Nevertheless, they attract a lot of hackers since they carry the money of millions of users in one center.

History tells that various exchange exchanges that are centralized have been hacked. Mt. A prominent exchange, Gox in 2014 lost billions of dollars of Bitcoin. Recently, customer funds might be lost in some smaller exchanges because of attacks.

Moreover, government can control centralized exchanges as they are companies. Should a government in a nation want to ban crypto, they could get centralized exchanges to freeze accounts. As an example, in Nigeria, when the Central Bank issued restrictions on crypto in 2021, a lot of individuals experienced problems in withdrawing their funds out of centralised solutions.

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Thus, centralized exchanges are convenient to use and even highly secure in some occasions, but the primary threat is, you do not have full control over your funds.

Decentralized exchanges appear to be safer in a sense. Because you hold your money in a personal wallet, hackers cannot ultimately target one particular exchange, and abscond with the funds belonging to all. Their primary idea to do it is to crack your personal wallet, but it is more difficult once it is used properly and in case you know how to keep your private keys well.

Yet, there is a danger to DEXs, as well. The greatest threat is meeting smart contract bugs. In case the computer program which runs the DEX contains an error, a hacker may exploit opportunity and steal funds. This already occurred with certain DeFi platforms. The other threat is false tokens and frauds. Since anyone can post a token to a DEX, it is quite easy to get in the trap of purchasing a coin which does not have any real value.

The next challenge associated with Nigerians is that DEX use may seem confusing to new entrants. You also have to be aware of how to link wallets, pay gas fees and occasionally figure out high transaction costs. In the event of a mistake you cannot call the customer care to get back your money. Once you have lost your money you are not going to get it again.

Which then is safer, the centralized and the decentralized exchanges?

There is no easy point. It depends on your perspective as to safety. Assuming that safety implies ease of use, regulation and customer support is there, centralized exchanges are safer. They are less neophyte unfriendly, have dedicated staff that works on security, and you can even complain when there is a problem.

However, in the event that safety means having control of your money, being without interference of the government and a reduction in the likelihood of losing money to a hack by an exchange, then the decentralized exchange is safer. One does not have to leave their trust with anyone but they themselves and their wallet.

As a matter of fact, neither of them is without any risks. Decentralized exchanges cannot be hacked, shut down or freeze your money. Decentral exchange might subject you to scamming, bugs, and user errors.

My views as a Nigerian are that both CEX and DEX should exist. The centralized exchange such as Binance may be preferred by many young Nigerians because they ease P2P by disrupting the system in situations wherein banks restrict crypto transactions. Meanwhile, however, I also have heard of individuals who have lost their money due to having left all their money on a centralized exchange which was subsequently hacked or blocked.

In my case the most reasonable option is a combination of both wisely. I am able to make purchases and sales promptly on a centralized exchange and move the bulk of my wallet to my personal version and potentially trade on the de-centralized swaps. In this manner, I have the convenience of CEX, and the security of self-control with DEX.

The discussion of centralised vs decentralised exchanges will not be stopping in the near future. Each has their positive and their negative. Centralized exchanges are banks: they are easy to use, they are usually trustworthy, but they are not under your complete control. Decentralized exchanges are similar to carrying your money: you own it but you have to be peculiarly attentive not to lose.

Which then is the safer? The reality is: it all is a matter of how you use them. Centralized exchanges can seem safer, in case you have the faith in companies and desire convenience. Decentralized exchanges will suit you better in case you are willing to study how to secure your wallet.

When all is said and done, in a world of cryptocurrencies, the best security is not in the exchange you go with but in what you know. When you educate yourself, familiarize yourself with the risks, and make prudent decisions, you may be a whole lot safer regardless of whether you use centralized or decentralized exchanges.