How Do You Know if a Crypto Exchange is Centralized or Decentralized?

Each class of crypto exchange has peculiarities that appeal to different users.

Navigating the Crypto Space

According to Crypto.com, the number of people that use cryptocurrencies is around 300 million. The number is projected to reach 1 Billion by the end of year 2022, roughly one-tenth of the world's population. While the numbers are steadily increasing, not everyone involved with crypto has sound knowledge of the fundamentals. 

For instance, decentralization and centralization are terms commonly used when describing cryptocurrency exchanges. But do you know the features that make an exchange centralized or decentralized? In this article, we will take a brief look at these terms to improve our understanding. Let's dive in. 

Cryptocurrency Exchanges

First, we need to know what a cryptocurrency exchange is. To put it simply, a crypto exchange is a platform where people buy or sell digital currencies. Each exchange has its rules of operation, but they all enable willing sellers of crypto to find willing buyers easily.

Depending on how it operates, a crypto exchange can be classified as either Centralized or Decentralized. Let us look at the characteristics of each class:

Centralized Exchanges - CEX

  • These are exchanges where buyers and sellers of crypto execute their trades through a third party. A great deal of trust is required to trade on centralized exchanges because traders leave their assets in the custody of the platform. 
  • Centralized exchanges always require their users to register an account using identifiable information such as names and email addresses etc., that is, know-your-customer (KYC), before users can make use of the exchange.
  • Centralized exchanges are typically regulated and need to comply with the regulations of the countries where they operate.
  • The exchanges in this class are not limited to any particular blockchain. They can support the trade of crypto assets belonging to any blockchain.

Prominent examples of Centralized exchanges include Binance, Coinbase, Kucoin, Huobi etc.

Decentralized Exchanges - DEX

This class of exchanges has opposite characteristics to that of Centralized exchanges:

  • Trades do not involve a third party to manage the transaction or have custody of traders' assets. Traders hold their assets in their personal wallets and only release them at the time of trade.
  • Decentralized exchanges require no form of KYC before users can trade. Anyone with a crypto wallet can trade on DEXes without any discrimination.
  • DEXes, because of their decentralized nature, are not easy to regulate. They can operate in any jurisdiction without needing to comply with regulations.
  • Most decentralized exchanges are built to operate on a particular blockchain. However, with recent developments, they have begun to support more than one chain though still not as much as the number supported by a typical CEX. 

Well-known examples of decentralized exchanges include UniSwap, PancakeSwap, BakerySwap, ApeSwap, 1Inch, SushiSwap, Dodo etc.

Is any class better than the other? Not necessarily so. Each one has its peculiarities which makes it appeal to different crypto users.

Concluding Factors

We have listed the most common characteristics that distinguish Centralized exchanges from Decentralized ones. The list does not contain all existing features; instead, it outlines the major things you should look out for when trying to classify an exchange. Most importantly, any exchange that requires you to register an account with your name and email address or other forms of KYC, and to deposit your assets out of your wallet to its wallet address before you can trade etc., is undoubtedly a Centralized exchange. If the exchange does not demand those requirements, you deal with a Decentralized one.

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