Centralized exchanges (CEX)
A centralized exchange functions much like traditional brokerages or stock markets. The exchange is run by the centralized authority that maintains complete control over every account and the ones account’s transactions. All transactions on a centralized exchange has to be licensed by the exchange; this involves that users place their trust in an exchange operators’ hands.
Advantages
Liquidity: Liquidity associated with an asset refers to its capacity to be sold without causing much price movement and minimum lack of value. Liquidity is crucial to ensure safety against market manipulation, for example coordinated “pump-and-dump” schemes. Centralized exchanges are acknowledged to have greater liquidity than other types of exchanges.
Recovery possible: Most centralized exchanges provide advantage of having the ability to verify a users’ identity and recover entry to their digital assets, if your user lose or misplace their login credentials.
Speed: Transaction speed matters for sure categories of cryptocurrency traders; it’s most important in high-frequency trading, where milliseconds count. According to an analysis by bitcoin.com, in accordance with other kinds of exchanges, centralized exchanges handle transactions faster, having an average speed of 10 milliseconds.
Disadvantages
Honeypot for hackers: Centralized exchanges lead to huge amounts of trades each day and store valuable user data across centralized servers. Hackers prefer them over other sorts of cryptocurrency trading platforms for that reason alone – essentially the most notorious hacks are already targeted at centralized exchanges, including Mt.GoX, BitFinex, and Cryptopia.
Manipulation: Certain centralized exchanges are already charged with manipulating trading volume, doing insider trading, and performing other acts of price manipulation.
Decentralized Exchanges (DEX)
Unlike centralized exchanges, decentralized exchanges (also known as a DEX) become autonomous decentralized applications running on public distributed ledger infrastructure. They let participants to trade cryptocurrency with out a central authority.
Centralized exchanges are often limited to participants within certain jurisdictions, require licensing, and have participants to confirm their identity (KYC: “know your customer”). Compared, decentralized exchanges are fully autonomous, anonymous, and lacking the same requirements. Several decentralized exchanges exist today, which we are able to categorize into three types: on-chain order books, off-chain order books, and automatic market makers.
Advantages
Custody: You will find there’s famous saying in distributed ledger communities, “Not your keys, not your crypto.”: digital assets and cryptocurrencies belong to whoever possesses the recommendations for a free account that holds those digital assets. As DEXs are decentralized, with out single entity owns them, users control their private keys in addition to their digital assets.
Security and privacy: Since users are not forced to proceed through KYC to make a free account over a decentralized exchange, users could be well informed their privacy is preserved. Regarding security, most DEXs employ distributed hosting and take other security precautions, thereby minimizing the chance of attack and infiltration.
Trustless: A users’ funds as well as data are under their own control, as nobody except a gamers can access that information.
Disadvantages
Low liquidity: Even top decentralized exchanges have a problem with liquidity for several digital assets – lower liquidity makes it easier to control markets with a decentralized exchange.
Blockchain interoperability: Trading or swapping two digital assets that you can get about the same distributed ledger is really a not hard procedure employing a DEX; trading two digital assets which exist on two different distributed ledgers can show incredibly challenging and need additional software or networks.
Hybrid Exchanges
A hybrid exchange combines the strengths of both centralized and decentralized exchanges. It facilitates the centralized matching of orders and decentralized storage of tokens – what this means is a hybrid exchange cannot control a users’ assets and possesses no way to halt someone from withdrawing funds. Simultaneously, a quick centralized database manages order information and matching trades instead of using potentially slow blockchain infrastructure.
Advantages
Closed ecosystem: A hybrid exchange can work in a closed ecosystem. Organizations can be assured from the privacy of the information while making the most of blockchain technology.
Privacy: Private blockchains are primarily utilized for privacy-related use cases in return for limiting communication with the public. A hybrid exchange can protect a company’s privacy while still and can speak with shareholders.
Disadvantages
Low Volume: Hybrid exchanges just have existed for a while. They don’t really yet contain the necessary volume being go-to platforms for choosing and selling digital assets. Low volume brings about a fairly easy target for price manipulation.
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