In the beginning, there was conventional finance—the banks we know so well, with their baggage, fees and monopolies.
And then there was decentralised finance, or DeFi, the apparent saviour of everyone who’s ever wanted real freedom to store, trade and make money.
DeFi is the foundation on which cryptocurrency trading is built—an open-source ecosystem which doesn’t need a central authority to manage it.
Created on a public blockchain, everyone can use it to enact peer-to-peer (P2P) transactions while keeping firm control of their own assets.
Sounds great, right? It is. But it can also be confusing and hard to navigate.
Starting off on the right foot
DeFi offers many centralised exchanges, which sounds like a misnomer but isn’t! Many blockchain users currently trade through centralised exchanges. These offer a few advantages over decentralised exchanges in terms of speed, ease of use and security.
Yet the number of decentralised exchanges is increasing, with more traders keen to try their luck in this fluid world. It’s like striking out in an ocean without a life belt, rather than swimming within the confines a known bay.
How centralised exchanges work
As with banks, centralised exchanges use a middleman or third party to control the show. In order for trades to work, users trust the middleman to look after their best interests and keep them safe.
This kind of exchange maintains customer accounts, facilitates trading and offers additional services like mobile apps for users. Trades may be from fiat to cryptocurrency (eg dollars to Bitcoin) or between cryptocurrencies, say Bitcoin (BTC) to Ethereum (ETH).
Centralised exchanges like Block Trade Exchange (BTX) for example allow users to trade from their Qoin wallets supported by an established organisation with security and collaborative tools firmly in place.
Decentralised exchanges operate differently
Cutting out the middleman, this kind of exchange operates on P2P trading in a ‘trustless’ environment.
Transactions are carried out via smart contracts and atomic swaps. This involves multiple chains, with significant lag times and more variables than a centralised deal.
Trading is public and visible to all, making it hard to maintain account security. Crypto assets are distributed throughout the crypto network, with account holders maintaining full responsibility for their own coins.
Four factors to consider in centralised vs decentralised
- Trading volume and velocity
Centralised exchanges—the larger the better—offer greater transaction volume and speed, helping to reduce price fluctuations and lower fees.
Greater public visibility on decentralised exchanges opens the door to frontrunning—where a third party jumps in control the trade and change the price.
- Wallet safety
Forget the key to your wallet and you can lose your crypto on a decentralised exchange.
- Security measures
Centralised exchanges usually offer extensive cybersecurity expertise to help prevent hacks, increase privacy and keep individual accounts safe.
The choice of a centralised or decentralised exchange will certainly require research and an understanding of your own goals before you dip a toe in the water!