Is Centralized or Decentralized Exchanges, Key To Global Crypto Adoption?

One of the longest-standing debates around cryptocurrency circles is whether decentralized exchanges, popular as DEXs, are better and more efficient than the ‘traditional’ centralized exchanges, or CEXs. Simply put, the main difference between the two schools of thought is that DEXs are built on a blockchain and do not hold the users’ private keys while centralized exchanges like Binance, Huobi, AAX exchange hold the users’ private keys. It’s all about who holds the user’s funds – centralized exchanges hold users’ funds, DEXs do not. 

Many in the cryptocurrency space praise decentralized exchanges claiming their superiority over centralized exchanges, claiming they will take over the market share of centralized exchanges in the future, which is currently well above 90% of the total market. But looking at the features and advantages of centralized exchanges, it will not be as easy as you would think. Actually, the two may end up co-existing in the long term as each offers its own advantages – that’s the school of thought this article is taking. 

We will discuss the advantages of both centralized and decentralized crypto exchanges, and why each of them holds importance to crypto traders. 

The genesis route for new crypto users

Centralized exchanges are trading platforms that function similarly to traditional brokerage or stock markets. You deposit your USD, EUR, GBP, JPY from your bank account, PayPal or any other fiat supported platform and you can start buying digital assets. Most centralized exchanges are owned and operated by a company that maintains total control of any deposits made. This means that users do not have any control over the private keys of their exchange wallets. They need to trust exchanges to keep their funds safe and provide user-friendly mechanisms to trade crypto. 

All the same, centralized exchanges offer users a wide spectrum of advantages and features that you cannot get on DEXs. 

The first main benefit of centralized exchanges is the high liquidity which allows traders to execute large trades without a significant change in price. At the time of writing, AAX exchange, the 57th largest centralized exchange recorded over $900 million in volume over the past 24 hours. In contrast, this figure would rank AAX Exchange as the third-largest DEX, which shows there’s still a long way to go in the adoption of decentralized exchanges.

As alluded to, centralized exchanges also provide users with a fiat-to-crypto onramp. For most people in crypto today, centralized exchanges are the first point of contact with digital assets, which makes sense. On CEXs, users can directly trade their fiat currencies for crypto on an easy-to-use and friendly platform. Whether on Binance, Coinbase, OKEX, AAX Exchange, Gemini, or, ordinary crypto investors can easily exchange their fiat to crypto without the complexities that surround the space. 

Finally, centralized exchanges also offer users a secure storage facility. This has been debated in the past whether it’s a good or bad thing. The good lies in that newbies who would otherwise have problems in storing their private keys are able to access “their coins” without the hassle of keeping their private keys safe. Additionally, exchanges can also help users retrieve lost coins, which is impossible with DEXs. 

In short, centralized exchanges enhance the convenience and reduce the complexities of trading crypto – especially for new users. 

Safety and privacy over convenience

Decentralized exchanges differ from centralized exchanges as they allow users to keep their private keys and remain in full control of their funds. Unlike CEXs, DEXs allow trading of cryptos on automated market makers (AMMs), which are controlled by pre-coded smart contracts. They leverage the power of blockchains in an effort to secure funds and enhance transparent trading. 

Decentralized exchanges are built on different blockchains including Ethereum, Avalanche, Fantom, etc. These DEXs differ in fees charged, speed of transactions, rewards, and other factors.

For instance, Pangolin, an Avalanche-based AMM enables users to swap assets while enjoying sub-second transaction finality and transaction fees as low as a few cents. Oftentimes, trades on Pangolin will feel as fast as trades on centralized exchanges. 

Additionally, Pangolin also backs its success on its community via its native token, PNG. The native governance token, PNG, enables the community to drive the development of the product in full. This is different from the centralized exchange native coins that are only used to incentivize trading on their respective platforms. 

Lastly, decentralized exchanges are ‘immune’ to regulatory pressures and geographical boundaries. This allows anyone across the globe to participate in the crypto ecosystem. Over the past few years, centralized exchanges have withdrawn their services from certain countries such as the US, China, and Iran due to the risks of being seen to offer unregulated trading of securities. Decentralized exchanges offer a way for individuals in any location to trade cryptocurrencies, as they aren’t run by a centralized authority that can be subjected to a shutdown order.

Parting shot

As shown above, both centralized and decentralized exchanges have a lot to offer to crypto users across the globe. The high liquidity, fiat-to-crypto onramps, and convenience by centralized exchanges or security, privacy, and global financial inclusion by decentralized exchanges, all contribute to the rise in crypto adoption. Embracing them both is key to the development of crypto solutions in the future. 

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