An exchange in the world of digital refers to a marketplace where users of the exchange platform can trade i.e. buy and sell various items. For example, in the world of finance, these could include securities, commodities, currencies, and options, amongst other items.
And whereas most cryptocurrency traders prefer to use centralised exchanges, we are seeing more and more people transition over to decentralised exchanges.
Let's take a deeper look into both centralized and decentralised exchanges, beginning with the former.
Centralised exchanges rely on intermediaries, typically private commercial enterprise, to facilitate trades between buyers and sellers. And in return for providing this service, the intermediary will usually charge a service fee i.e. a regular subscription fee for use of their platform, or, a trading fee such as an agreed commission based on the value of the trade.
Four of the largest and most popular centralised exchanges as of 2021 include Binance, Huobi, Coinbase and Kraken.
A decentralised exchange on the other hand is an exchange platform that does not require an intermediary to facilitate trades on behalf of buyers and sellers, and instead directly matches the aforementioned to one another via the use of preprogrammed smart-contract software. There are many reasons as to why one might choose a decentralised exchange over and above their decentralised counterparts, with the three most obvious being price, privacy, and security.
Price: Decentralised exchanges are simply cheaper than their centralized counterparts. And although fees may fluctuate in response to network utilization, they typically remain far lower than the costs incurred on centralised exchanges.
Privacy: Whereas centralised exchanges may ask for personal information such as an email address, proof of identity, and a phone number while registering, decentralised exchanges do not require that users disclose their personal information with an intermediary, such as a private business, and instead share only minimal data required to complete the transaction with those parties trades are being conducted with.
Security: Security is another important factor when comparing exchanges, as centralized exchanges store one's private keys within hosted wallets, putting one's cryptocurrency funds at higher risk in the event of a security breach by a malicious third party.
Four of the most popular decentralised exchanges as of 2021 include MDEX, Uniswap, PancakeSwap and BurgerSwap.