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Centralized exchanges (CEX)

A centralized exchange functions much like traditional brokerages or stock markets. The exchange is owned and operated by a centralized authority that maintains complete control over every account and those account’s transactions. All transactions on a centralized exchange have to be authorized by the exchange; this requires that users placed their rely upon an exchange operators’ hands.

Advantages

Liquidity: Liquidity associated with an asset describes its capability to be sold without causing much price movement and minimum lack of value. Liquidity is important to ensure safety against market manipulation, for example coordinated “pump-and-dump” schemes. Centralized exchanges are known to have greater liquidity than other types of exchanges.

Recovery possible: Most centralized exchanges offer the benefit of being able to verify a users’ identity and recover access to their digital assets, when the user lose or misplace their login credentials.

Speed: Transaction speed matters for many sorts of cryptocurrency traders; it’s most important in high-frequency trading, where milliseconds count. According to an analysis by bitcoin.com, compared to other kinds of exchanges, centralized exchanges handle transactions faster, with the average speed of 10 milliseconds.

Disadvantages

Honeypot for hackers: Centralized exchanges have the effect of billions of trades each day and store valuable user data across centralized servers. Hackers prefer them over other cryptocurrency trading platforms for this reason alone – the most notorious hacks have been geared towards centralized exchanges, including Mt.GoX, BitFinex, and Cryptopia.

Manipulation: Certain centralized exchanges happen to be accused of manipulating trading volume, playing insider trading, and performing other acts of price manipulation.

Decentralized Exchanges (DEX)

Unlike centralized exchanges, decentralized exchanges (also called a DEX) act as autonomous decentralized applications running on public distributed ledger infrastructure. They let participants to trade cryptocurrency without having a central authority.

Centralized exchanges in many cases are 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 without those self same requirements. Several decentralized exchanges exist today, which we can categorize into three types: on-chain order books, off-chain order books, and automated market makers.

Advantages

Custody: There’s a famous saying in distributed ledger communities, “Not your keys, not your crypto.”: digital assets and cryptocurrencies belong to whoever possesses the recommendations for an account that holds those digital assets. As DEXs are decentralized, with no single entity owns them, users control their private keys as well as their digital assets.

Security and privacy: Since users usually are not necessary to undergo KYC to produce an account on the decentralized exchange, users could be much more confident their privacy is preserved. Regarding security, most DEXs employ distributed hosting and take other security precautions, thereby minimizing potential risk of attack and infiltration.

Trustless: A users’ funds and private data they are under their own control, as nobody except you can access that information.

Disadvantages

Low liquidity: Even top decentralized exchanges have trouble with liquidity for many digital assets – lower liquidity makes it much easier to manipulate markets with a decentralized exchange.

Blockchain interoperability: Trading or swapping two digital assets which exist about the same distributed ledger is a not hard procedure employing a DEX; trading two digital assets which exist on two different distributed ledgers can prove 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 – this means a hybrid exchange cannot control a users’ assets and possesses not a way to avoid someone from withdrawing funds. Simultaneously, a quick centralized database manages order information and matching trades as opposed to using potentially slow blockchain infrastructure.

Advantages

Closed ecosystem: A hybrid exchange can be employed in a closed ecosystem. Organizations can be assured in the privacy with their information while benefiting from blockchain technology.

Privacy: Private blockchains are primarily used for privacy-related use cases in return for limiting communication using the public. A hybrid exchange can protect a company’s privacy while still letting it communicate with shareholders.

Disadvantages

Low Volume: Hybrid exchanges just have been known for a short moment. They do not yet contain the necessary volume to become go-to platforms for buying and selling digital assets. Low volume makes them a simple target for price manipulation.

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