In 2021, cryptocurrencies became mainstream in the financial world

​What are centralized and decentralized crypto exchanges

17.01.2022

353

11 min

. Among the huge number of cryptocurrency exchanges, it is difficult to choose a platform where you can buy, sell or trade cryptocurrency on optimal terms. All platforms can be divided into centralized exchanges (CEX) and decentralized exchanges (DEX). You can find out the difference between them from our article.

What is a cryptocurrency exchange?

Digital currency exchange is an online platform for trading cryptocurrencies, that is, buying and selling cryptocurrencies for traditional money or exchanging digital assets between one another.

CEX, or centralized exchange, pros and cons

The term “centralized cryptocurrency exchange” may mislead novice investors, since cryptocurrencies themselves are “decentralized digital assets.” However, there is no contradiction here.

These exchanges are called centralized because they are managed by a private commercial company. It controls all operations, provides maintenance, storage services, and protection of funds. Data exchange in CEX is carried out internally through dedicated servers and goes through centralized security processes. Users trust the management of their crypto-exchange funds, as they trust money to a bank when they open an account.

The cryptocurrency market is growing rapidly; its capitalization now reaches $2,7 trillion, while only a year ago it was about $400 million. States cannot allow a market with such a turnover to remain in a gray area. As long as cryptocurrency is not regulated, citizens are not protected in any way from unscrupulous market participants. In addition, the lack of uniform financial reporting standards makes it impossible to tax income from cryptocurrency trading. As market capitalization grows, cryptocurrencies are attracting more and more regulatory attention. According to the IMF, stricter supervision will prevent the use of cryptocurrencies for fraud and speculation.

Regulators impose requirements on centralized exchanges as financial service providers. These exchanges participate in AML programs, introduce KYC. Therefore, in order to purchase cryptocurrency on a centralized platform, it is necessary to undergo identity verification.

Typically, users of regulated exchanges must confirm their identity, citizenship and pass a background check for engaging in illegal activities. Also, operators of centralized exchanges analyze the sources of receipt and crediting of funds, search for suspicious transactions and evaluate too large transaction volumes.

If the exchange receives cryptocurrency from suspicious sources, the administration may freeze the recipient's account. There is a way to avoid blocking transactions and wallets on the exchange. You can use cryptocurrency purity checking services provided by GetBlock service. You should check your wallet before sending funds from it to the exchange. If the check assigns a high level of risk to the wallet (90% or higher), it is worth refusing to transfer such funds to the exchange. There is a high probability that the exchange will block these funds. Following simple rules will also help.

Receive each new incoming transfer to a new address. Check all incoming transactions or senders' wallets. If the risk of receiving funds from suspicious sources is high, it is better to reject them.

Centralized exchanges have many advantages: the ability to buy a cryptocurrency for fiat money, the availability of 24/7 user support, extensive functionality for trading, high liquidity, and fast execution of transactions. Centralized exchanges do not provide users with access to their private keys, so you can restore access to your wallet if the password is lost.

Centralized exchanges have many advantages: the ability to buy a cryptocurrency for fiat money, the availability of 24/7 user support, extensive functionality for trading, high liquidity, and fast execution of transactions. Centralized exchanges do not provide users with access to their private keys, so you can restore access to your wallet if the password is lost.

But you should not forget about the risk of losing money in case of fraud on the part of the exchange, its bankruptcy, or hacker attack.

In the spring of 2021, hackers withdrew cryptocurrency from the accounts of at least 6,000 Coinbase users. The exchange has yet to identify exactly how the attackers gained access to the data to log into users' accounts. This case shows that hackers are becoming more and more sophisticated, and even the largest centralized sites are not immune to attacks.

How can CEX users protect themselves?

Before depositing funds in an exchange, you need to make sure that it operates following local laws and has a license from financial regulators. The management of the exchange should be known and open to communicating with the user community.

To protect your account on the exchange, you need to set a strong password and two-factor authentication. It is equally important to store the password correctly, it is better to use special applications (OneSafe, LastPass) for this purpose.

Do not use the exchange as a wallet for long-term storage of large amounts of cryptocurrency. In this case, it is better to choose a cold, hardware wallet.

The source: Coinmarketcap.com

The most popular CEX

To understand which exchange it is better to choose for a Russian user, let's look at several leading CEX in terms of traffic, liquidity, and trading volume.

Binance managed to become exchange number 1 by trading volume in less than a year after its launch, it still has not lost its leading position. Why? Binance offers plenty of opportunities to make money, such as spot trading, derivatives trading, margin trading with up to 125x leverage, P2P trading. Binance has a loyal commission policy: there is no commission for deposit in fiat for some currencies, trading commissions are from 0,1% and lower. For BNB exchange token holders there is a 25% discount on the spot trading fees.

Deposits and withdrawals in rubles are available on Binance. Only verified users can trade cryptocurrency. To do so, it is enough to upload a photo of a Russian passport or driver's license, take a selfie and pass a face check.

Also, Binance has a wide range of additional products. The exchange allows you to set up API keys to automate trading, participate in brokerage programs and even become an institutional trader. And for investors who want to better understand cryptocurrencies, blockchain, and mining or build their own trading strategy, Binance has developed its own education platform Binance Academy, all materials are translated into Russian.

FTX is a relatively young exchange, that started operating in 2019. The platform makes it possible to exchange fiat for cryptocurrencies, deposit, and withdrawal of funds without commissions. The exchange provides many tools for trading, such as futures, tokenized stocks, trading with leverage. The standard commission of the maker is 0,002%, that of the taker is 0,007%, but it can be reduced depending on the trading volume.

There is a withdrawal limit for unverified users, namely, not more than $1000 per day. To start using the service without restrictions, you must provide your photo with a passport or driver's license and proof of residency (utility bill, rental agreement, etc).

FTX does not accept rubles, but it is possible to enter USD via Visa and Mastercard cards of Russian banks.

Commission discounts are also provided for holders of FTT exchange tokens. The exchange has created tools for generating additional income, including:

  • lending (the user lends credit to the platform);
  • staking (the user stores funds on their account and gets rewarded for it);
  • prediction market (you can make predictions about the outcome of any socially important events and receive a reward if they come true);
  • opportunity to trade NFT;
  • referral program (participants receive 25-40% of the commission paid by the referral).

Huobi supports over 200 cryptocurrency pairs and is known for high data security. The platform has wide functionality, including spot and futures trading, options, swaps and even an OTC platform for institutional traders.

Margin trading is available with 3x leverage and up to 125x for futures. Huobi offers a flexible commission system. Deposits are free, the withdrawal fee depends on the currency, for example, 0,0005 BTC for bitcoin, the basic commission for spot trading is 0,2%, but users with a large trading volume or holders of an internal Huobi Token coin can reduce it significantly.

Huobi has a training platform, but all the material on it is presented in English.

Since January 2021, Huobi accepts bank cards in rubles, both deposits and withdrawals are possible. Without verification, you can withdraw up to 1 BTC. For verification, you can provide a passport, a foreign passport, or a driving license. After passing this procedure, the withdrawal limit increases up to 100 BTC.

DEX, or decentralized exchanges

A decentralized exchange is an online service for trading cryptocurrency without an intermediary. The operation of such an exchange is automated with the help of smart contracts. Management is carried out by voting of the owners of special managing tokens. A decentralized exchange works on a blockchain, so it is not possible to buy a cryptocurrency for fiat, it is only possible to exchange one digital asset for another.

Decentralized exchanges are not regulated in any way. These exchanges have no legal entities, which will be responsible in case of violations. Decentralized exchanges work on the basis of a distributed registry, their source code is freely available.

What benefits do decentralized exchanges offer?

Decentralized exchanges have many advantages.

The exchange is direct between two users, any intermediaries are excluded from the chain, there is no need to entrust the storage of their funds to third parties. Users do not need to spend time passing the verification to make transactions. Decentralized exchanges have no management, which can freeze the account.

However, we should not forget that compared to centralized exchanges, decentralized ones have scarcer functionality. Trading operations are performed on the blockchain, so there will be higher commissions and lower speed, especially at times of high load on the network. Another disadvantage is the lack of customer support.

The user, that is, the private key holder, is responsible for the safety of the funds. If this key is lost, it is impossible to restore access to a non-custodial wallet.

How to get started with DEX?

Although decentralized exchanges are more secure than centralized ones, the risk of losing your money remains. Fraudsters can create a copy of the decentralized site to steal users' funds. Therefore, check the URL of the site carefully before entering your password.

The source: Coinmarketcap.com

Let's take a closer look at how decentralized exchange is set up and how a user can provide liquidity using the example of the multifunctional dYdX exchange. This is one of the few DEX, the interface of which is translated into Russian.

dYdX runs on Ethereum smart contracts. Users can exchange, borrow and deposit ERC-20 tokens, margin trading with up to 25x leverage is also available.

To start interacting with the exchange, just connect your Ethereum wallet. Wallets with WalletConnect (Metamask, Ledger) are supported.

The dYdX trading platform offers three trading options, namely, spot market, margin trading, open-ended futures contracts. A separate account is used for each of them. The main trading pairs are ETH-USDC, ETH-DAI, and DAI-USDC. An important distinguishing feature of the platform is the fact that it allows you to open short positions on open-ended contracts to profit from falling rates or to hedge risks.

The credit platform allows you to borrow or lend ETH, USDC, DAI. When depositing funds to the deposit account, interest will be accrued automatically. To obtain a loan, an LTV of up to 75% is required. When the 85% level is reached, the transaction will be forcibly closed and a fine of 5% will be withheld. The interest rate on the loan is floating and is calculated dynamically depending on the current liquidity pool.

The exchange's own token under the DYDX ticker allows you to participate in protocol management, receive discounts on trading commissions, and also receive passive income, which consists of the following components:

  • retroactive mining rewards (distributed between those who trade using the second-level protocol and those who have been using the platform for a long time);
  • trading rewards (distributed among all dYdX traders depending on the number of trades and their volume);
  • rewards to liquidity providers (distributed among those who maintained a minimum volume of 5% during the previous era).

Uniswap is the leader among decentralized projects today. It operates on the Ethereum blockchain and uses an automated market maker algorithm. It allows clients to both make exchange transactions and participate in liquidity pools, receiving remuneration from 0,05% to 1%. We have covered Uniswap in more detail in a separate article.

CEX vs DEX

There are no winners or losers in the battle between centralized and decentralized exchanges. CEX and DEX are significantly different. Centralized exchanges offer ease of use and wide functionality, while decentralized exchanges offer anonymity and full control over your own funds.

If you ask the question “Which exchange to choose?”, there is no simple answer. In any case, it is better to study user reviews on independent forums, become familiar with the terms of use on the official site of the exchange, as well as learn about the team who created it.

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