Published 2 weeks ago • 4 minute read

Understanding the differences between trading on centralized and decentralized exchanges

If you've been trading cryptocurrencies for a while, you may have heard of centralized and decentralized exchanges. But what exactly is the difference between these two types of exchanges? And why should you care? Let's explore both sides of this coin so that you can make an informed decision about which type will suit your needs best!

What's the difference between centralized and decentralized exchanges?

Centralized and decentralized exchanges are different, but they both have the same purpose: to facilitate the trading of cryptocurrencies.

Centralized exchanges are often referred to as “exchanges” because they're essentially just software that allows you to buy or sell a cryptocurrency using your bank account. These types of platforms require you to deposit funds into an account, then send them out again in order to complete any transactions. Centralized exchanges are also sometimes referred to as OTC (over-the-counter) markets because they take place between buyers and sellers who don't want their identity revealed publicly on an open market like what happens when there's only one screen connecting buyer and seller via the internet connection between them—such as when someone buys some Bitcoin from another person on Reddit forums!

On the other hand, decentralized exchanges are networks built on top of blockchain technology (which we'll talk about later) that allow users around the world to access their crypto holdings without requiring third parties such as banks or governments to control access - meaning there aren't any limitations whatsoever regarding where people can trade crypto assets!"

What to know about centralized exchanges

Centralized exchanges are the most common type of trading platform, and they're great for beginners. On a centralized exchange, you don't have to worry about security because everything is handled by an underlying company that holds your funds.

Centralized exchanges also offer some advantages over decentralized ones:

  • You can trade with any fiat currency on the market (USD, EUR)
  • More exposure to various tokens and coins ultimately means more opportunities for profit

What to know about decentralized exchanges

Decentralized exchanges are newer and less popular, but they are also more secure, easier to use and regulated than centralized exchanges. For example, they're not susceptible to hacks like those that took place during the Mt Gox hack in 2014 or when $400 million worth of ether was stolen from the DAO project's smart contract in 2016.

They also have fewer features than their centralized counterparts: you can't watch the trading activity on a decentralized exchange as you can with Coinbase Pro or Binance (though there are some services like Ethfinex which do allow this). But if security is your main concern then this might not matter as much because hackers don't usually target decentralized exchanges with high amounts of money at stake; rather they would go after larger wallets with more users involved (as happened during Mt Gox).

It's good to understand what both are and how they work.

If you're new to cryptocurrency trading, it's important to understand what both centralized and decentralized exchanges are. Centralized exchanges are like banks: they host your funds and provide a platform for buying and selling cryptocurrencies. Decentralized exchanges, on the other hand, are more like peer-to-peer markets: you don't need a third party (like Coinbase) to hold onto your coins for you; instead of giving them power over your assets in exchange for an account with them on their system, these platforms allow users to trade directly with each other without having any financial involvement from third parties at all! That said...

The main benefit of using a centralized exchange is speed—they're faster than decentralized platforms because there's no need for consensus among users about who owns which assets at any given time. There are also fewer risks associated with using such services because they've been tested by years of practice before being released into mainstream use today--so if something goes wrong during one transaction on one day then everything else should continue running smoothly without any interruptions whatsoever after that point onward...

Conclusion

Decentralized exchanges and centralized exchanges are both types of trading platforms that allow investors to buy and sell cryptocurrencies. The difference is in how they operate, which is why you should understand how they work before using them. Decentralized exchanges are much more secure than their centralized counterparts because they run on blockchain technology which makes it impossible for hackers or governments to access your personal data, while the latter can be shut down at any time if there's an issue with its code base or other dependent components within itself.

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