Photo by Adam Nowakowski on Unsplash
In simple terms, cryptocurrency trading refers to the process of buying or selling cryptocurrencies based on the market and price fluctuations of the crypto tokens. Crypto trading usually operates at an exchange that can be either centralized or decentralized.
But, when it comes to the trading, the usual drill for it is to create an account, come up with a password, and when you’ve done so, start trading. This is indeed the basic mantra that every exchange operates on. However, there’s a certain relaxation in this procedure when it comes to a decentralized exchange. They are aimed at saving a person from the unwanted hassle of going through the signup procedure.
However, if you’re up for the hassle-free signup procedure, you must be smart with the trading because decentralized exchanges are a bit complicated to manage. Well, this does not mean that trading on a centralized exchange is any easy. Even a CEX trading comes at the potential risk of fund insecurity.
So, in this article, we will dive a bit deeper into understanding how the CEXs and DEXs operate and what is the benefit/shortcoming when it comes to choosing them as a trading platform.
Excited to dive deeper? Let’s get started!!
DEX refers to a decentralized exchange. A decentralized trade involves a P2P transfer of funds in the user wallets without third-party intervention. Their backend is usually a blockchain where the user acts as the sole owner of the private keys to the crypto funds. Therefore, the funds are not exposed to a third party risk and are often saved from the inherent prospect of getting looted by the hackers.
Let’s begin with the advantages!
- No need for KYC.
- No third party risk involved.
- Non listed tokens from centralized exchanges can be traded on a decentralized exchange.
Disadvantages:
- Not very user-friendly.
- High trading fees might be an issue.
- Lower liquidity and trading demands as compared to CEXs.
Unlike a DEX where trading takes place directly between the parties of interest, a CEX involves a third party for the transaction verification. In simple terms, you don’t own the private keys to your crypto funds. Instead, it is the exchange that manages the transfer of funds between the parties of interest. Having said this, it’s also important to understand that you should have trust in the exchange with the funds that you’re planning to invest as the funds are allocated in the exchange’s database.
Let’s begin with the advantages!
- High liquidity.
- Wide variety of options in terms of exchanges for trading.
- Simple to understand and operate.
Disadvantages:
- The third-party risk involved.
- Limited support for currencies i.e. only a few currencies is allowed!
- High fees of trading.
The concept of self-sovereignty has emerged with the DEXs as they aim at eradicating the third party intervention completely. Moreover, they offer every user, the right to their funds which somewhere attracts a better customer base as compared to the CEXs. But then again, the debate between which is better depends on the individual experience, preferences, and ease of use.
What do you think about this? Would you prefer DEX over CEX or vice-versa?
Let me know your views in the comments! Until then, keep reading 🙂
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