Centralized exchange is one of the first type of currency exchanges, even in the real world, people tend to use centralized exchanges like Banks to manage their money. Why the hassle if people can do it for you, right?
What makes a centralized exchange appealing to some people is because it is a more trusting type of exchange. Meaning, you get to put your virtual funds to a centralized entity (or a middleman), whom you trust, to manage and exchange your transactions. You mostly pay a one-time fee for a transaction to be finished in a centralized exchange. This type of exchange is user-friendly, thus, suitable for beginners.
However, there are downsides to using this type of exchange.
A centralized exchange is more vulnerable to hacks since it uses an online database to store your virtual money. Online hacking is inevitable, so choosing the right services which has a top notch security is the best option you should be doing when selecting the appropriate centralized exchange service.
Like all centralized transactions in the real world, the blockchain one is subject to government regulations, which make anonymity a bit hard to implement. When cryptocurrency started to become a norm, there are suspicions that these kind of anonymous exchanges can be used for criminal activities, which is a very huge possibility since people can exchange anonymously without the prying eyes of KYC (“Know Your Customer”) regulation and AML (anti-money laundering) government agency. But, if you are into cryptocurrency to trade and invest without the need of anonymity, then a centralized exchange is for you.
Decentralized Exchange (DEX)
Decentralized exchange is a way of telling centralized banks and governments that people can have their own transactions without the need of their regulations and services. Cryptocurrency existed because it wanted to decentralize from the monopoly that is in the world today and also promotes online anonymity. Both in the real and online world, you need visas and credit cards, regulated by the government and banks, in order to buy and exchange online. The case is different for a decentralized exchange in cryptocurrency. In a DEX, you can store your own virtual money to your own “wallet”, encrypted and only accessible by you using a private key or a random word combinations.
A decentralized exchange is less vulnerable to hacks since you can store your wallet in a very secure hardware. There will be no need for a centralized party to exchange your cryptocurrencies, it is only done peer-to-peer. The good thing is, both parties do not require KYC regulations, you can be like ghosts trading with each other.
But, the downsides of using a decentralized exchange are:
Lost funds and traffic
The sad thing about a decentralized exchange is that, when both parties are exchanging and the transaction has failed, the fee used to power the exchange will be lost and will be non-refundable. That is why people should choose the right DEX service. A DEX is also affected by the congestion of exchanges, meaning, it can sometimes take up too long for a transaction to be finished because of traffic in exchanges done online, especially if the encrypted hardwares (since there is no centralized party, the exchange is done in individual hardwares acting like a node) used by a blockchain are limited. A centralized exchange can be vulnerable to traffic at one point, but less common like in the decentralized one.
Most decentralized exchanges aren’t user-friendly and requires knowledge in processing and managing unfamiliar online transactions. If you are starting out and not tech-savvy, stay away from a “bit” complicated decentralized platform because it will surely give you a headache. But hey, all is worth if you master the art of decentralized trading.
If you are up to an exchange where you can control your own resources while being anonymous, a decentralized exchange is suited for you.
Last, but not the least..
A hybrid exchange is the new generation of blockchain exchange, the competition between CEX and DEX gave birth to a Hybrid exchange, which aims to merge the benefits of a centralized and decentralized exchanges. If you want the reliability of a CEX and the anonymity of a DEX, the Hybrid type is the best choice. This is seen as the future of all cryptocurrency exchanges. However, people did not immediately jump ship from using their old-school platforms to the new one because a Hybrid exchange is still prone to platform bugs which can get transactions stuck in mid-air. Many are still unsure about the security the Hybrid platform offers and the anonymity it can really give since it still requires government regulations. To sum it up, it will take time for people to trust and know the Hybrid platform since it is not popularly-used by cryptocurrency traders.
Choosing the best cryptocurrency exchange depends on your preference. Some argue the CEX is the way but some insist it is the DEX. But in the internet world, diversity is what kept the cryptocurrency alive. That is why a centralized platform like Facebook exists alongside a decentralized platform like Bittorrent. Based on what you’ve read above, the choice will always be yours in this uncharted territory of cryptocurrency.
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Source : https://medium.com/@jhemtrinidad00/which-type-of-cryptocurrency-exchange-do-you-trade-on-c0e044a2f791