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26.09.2018

What are the main differences between centralized and decentralized exchanges?

Bitcoin, the world’s first peer to peer payment system to allow its users to transfer value without the need for third parties or centralized authority, was created with the underlying philosophy of decentralization in mind. Decentralization is more than just a technical term.

Bitcoin’s creators were inspired to return the control of money to its users, thus challenging centralized financial authorities and governments the world over. Through Bitcoin and its subsequent cryptocurrency spinoffs, problems with fraud, censorship, and manipulation are supposed to be things of the past.

To assist users with rapid transactions, the crypto exchange industry was created. However, perhaps due to the allure of wealth that has drawn many into the crypto sphere, many users entrust their coins to third parties operating what are known as centralized exchanges. Ironically, centralized exchanges fly in the face of the original philosophical idea of decentralization that inspired Bitcoin in the first place. Despite this fact, centralized exchanges do play an important role in the crypto economy.

Centralized exchanges

Centralized exchanges have several benefits. They are easy to use, easy to access, and can provide advanced financial services like margin trading and shorting. However, despite the ease of use and access, they have many downsides.

According to the developers of EXCC, an all-in-one exchange platform incorporating a centralized exchange Xult, decentralized exchange DEX, and an exchanger service Xchange.me, there are several problems with relying exclusively on centralized exchanges:

  • Users do not have access to the private keys of their exchange wallets, forcing them to entrust their funds to external, potentially untrustworthy centralized exchange companies.
  • Exchange owners maintain full control over all exchange-made transactions, leaving the potential for abuse by speculation.
  • Centralization is vulnerable to shut down by governments and regulators, or leaves users vulnerable to surveillance and monitoring by authorities.
  • They’re subject to wash trading and other rabid speculation.
  • Finally, they are prime targets for hackers, who can potentially access the centralized ledgers containing private keys and other personal information, leading the theft and permanent loss of assets.

Decentralized exchanges

Regardless, crypto users need a way to exchange their assets. Fortunately, there is an emerging market for crypto users looking to exchange their coins without third parties or centralized authorities: decentralized exchanges. Contrary to centralized exchanges, decentralized exchanges report numerous innovative solutions to previously identified problems. According to the EXCC team who are currently developing a decentralized exchange to complement their centralized exchange, the benefits are many:

  • A decentralized architecture means that data is not kept on a single server, but is instead shared among all users. Thus decentralized exchanges cannot be shutdown so long as there is at least one active user.
  • Safety from third party risks. Without a centralized authority, there is no need to transfer your valuable crypto assets to vulnerable centralized platforms in order to trade. Instead, users maintain full control of their assets at all times.
  • Decentralization means increased anonymity. Without requirements for registration or verification, decentralized exchanges utilize peer to peer connecting to securely administer transactions directly between users.
  • Security of assets. Since there are no centralized servers or ledger vulnerable to attack by malicious hackers, assets stored on decentralized exchange blockchains are secure.
  • Reliability of use. Decentralized exchanges like EXCC’s are much more resistant to DDoS style attacks, making them reliable in operation and performance. Additionally, distributed hosting via decentralized nodes means infrastructure is invulnerable to break down.
  • Transparency in operation. Since user’s control their trades, they have full access to symmetrical information, preventing wanton manipulation or abuse.

Read more in the updated EXCC Whitepaper >> 

The future of exchanges

Many innovators and entrepreneurs in crypto believe that decentralized, blockchain-backed solutions are the future of the exchange industry. The advantages that come with this technology have not gone unnoticed by large players in the crypto and financial industries as more and more institutions continue to invest in blockchain based solutions. Moreover, decentralized exchanges are the solution to the issues of centralization posed by centralized exchanges, as even governments cannot take them down.

That being said, centralized exchanges still have their uses. For instance, decentralized exchanges function only to trade crypto assets, and cannot yet incorporate fiat trading. As long as this constraint remains in place, centralized exchanges will have a monopoly in direct fiat for crypto trading. Thus first time users wishing to purchase their first coins should make use of a trusted centralized exchange. Once a user has purchased crypto with fiat, they can decide to move their assets off of a centralized platform. If so, smart users looking to make crypto for crypto transactions should look to decentralized exchanges for this service.

New decentralized exchanges are currently being developed to provide users with the advanced features and ease of use that they need to trade safely and securely. Among these is the EXCC-DEX, the part of the overall EXCC ecosystem that will allow users to trade crypto assets directly with each other according to the decentralized peer to peer exchange principles outlined in this article.

The exchange revolution

The future of crypto trading and the exchanges where transactions are made is in decentralization. Staying true to the founding philosophy of Bitcoin and cryptocurrency, decentralized exchanges fulfill the ideas originally presented in Satoshi’s Bitcoin white paper. While there is still a ways to go before decentralized exchanges reach their full potential, the speed in which decentralized and cryptographically secure technology is advancing is a force to reckon with. It will not be long before users all over the world will benefit from the innovative technologies presented by decentralized exchanges.

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