There are more than 85 million crypto wallets, according to Blockchain.com, meaning more than 1 in every 100 people are using cryptocurrencies in some capacity. This number is expected to grow as Web3 becomes more apparent and crypto becomes more mainstream. At the heart of the crypto market are exchange platforms, allowing investors to buy, sell, and trade cryptocurrency. There are two different types of exchange: centralized and decentralized.
If you look at a decentralized exchange DEX diagram, each blockchain is interlinked on an equal playing field, with no central entity. What this means is the ability to freely trade crypto assets while boosting liquidity, which is essential to the cryptocurrency market.
Decentralized markets rely on the traditional order book model or the automated market maker (AMM) model. The book order model involves:
- Crypto owners placing orders to buy or swap assets.
- The community bidding on a selling order.
- Both parties assessing the offers and executing the order.
Whereas, the AAM model involves:
- Smart contracts are used for asset liquidity. Pooling funds allow a return on swaps.
- When swaps are made within a pool, the ledger assets are balanced.
- When a high trade enters a low-level pool, the resulting order is placed above market value.
DEX Pros and Cons
The beauty of decentralized exchanges, like Alium Finance, is that they’re completely anonymous and there are zero requirements for third-party involvement. Further, all liquidity is split between asset providers, as opposed to a central benefactor. However, fiat currencies aren’t tradable on DEX exchanges, and it can be difficult to place large orders, especially when the liquidity pool is running low.
As you may have guessed, central exchanges are the middle ground for selling, buying, and trading, even between fiat currencies and crypto. A reputable exchange will manage all deals, and will usually have custodian functionality, which means you can store your crypto assets natively. The most well-known centralized exchanges are Coinbase, Kraken, and Gemini.
CEX Pros and Cons
Centralized exchanges are perfect for beginners because they’re user-friendly and offer immediate access to the market. Further, if you use a reputable CEX like those mentioned above, you have added protection and security for your assets. Whereas, bogus altcoins can easily be added to DEX in an attempt to scam investors.
Although CEX provides a secure and simple platform for crypto trading, many exchanges charge a service fee, which almost defeats the point of blockchain tech. Further, a centralized platform can be shut down by authorities, meaning your assets can be pulled without warning. Finally, although CEX platforms are secure, they are much more vulnerable to cyber attacks than DEX.
There are valid arguments for using both CEX and DEX, but the choice will come down to user experience and needs. DEX is perfect if you’re only trading cryptocurrencies with other cryptos, as the value is much more accurate because it’s community-based and the trade is more secure. Whereas, CEX is perfect for beginners and those needing to transfer crypto funds back to fiat currencies.