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Centralized exchanges (CEX)

A centralized exchange functions much like traditional brokerages or stock markets. The exchange is run by a centralized authority that maintains complete treating every account and those account’s transactions. All transactions on the centralized exchange must be licensed by the exchange; this involves that every users placed their rely upon an exchange operators’ hands.

Advantages

Liquidity: Liquidity of the asset identifies its capability to be sold without causing much price movement and minimum lack of value. Liquidity is vital to ensure safety against market manipulation, including coordinated “pump-and-dump” schemes. Centralized exchanges are acknowledged to have greater liquidity than other kinds of exchanges.

Recovery possible: Most centralized exchanges provide you with the good thing about being able to verify a users’ identity and recover access to their digital assets, should the user lose or misplace their login credentials.

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

Disadvantages

Honeypot for hackers: Centralized exchanges are accountable for billions of trades every day and store valuable user data across centralized servers. Hackers prefer them over other kinds of cryptocurrency trading platforms for that reason alone – one of the most notorious hacks happen to be aimed at centralized exchanges, including Mt.GoX, BitFinex, and Cryptopia.

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

Decentralized Exchanges (DEX)

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

Centralized exchanges will often be only at participants within certain jurisdictions, require licensing, and enquire of participants to confirm their identity (KYC: “know your customer”). In contrast, decentralized exchanges are fully autonomous, anonymous, and devoid of those same requirements. Several decentralized exchanges exist today, which we can categorize into three types: on-chain order books, off-chain order books, and automatic market makers.

Advantages

Custody: There exists a famous saying in distributed ledger communities, “Not your keys, not your crypto.”: digital assets and cryptocurrencies are owned by whoever possesses the secrets of a merchant account that holds those digital assets. As DEXs are decentralized, no single entity owns them, users control their private keys as well as their digital assets.

Security and privacy: Since users are not needed to go through KYC to generate an account on a decentralized exchange, users can be well informed that the privacy is preserved. Regarding security, most DEXs employ distributed hosting and take other security precautions, thereby minimizing the chance of attack and infiltration.

Trustless: A users’ funds and personal data they are under their own control, as nobody except the users has access to that information.

Disadvantages

Low liquidity: Even top decentralized exchanges struggle with liquidity for certain digital assets – lower liquidity makes it much simpler to govern markets over a decentralized exchange.

Blockchain interoperability: Trading or swapping two digital assets available about the same distributed ledger is really a relatively simple 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 no chance to halt someone from withdrawing funds. Simultaneously, a quick centralized database manages order information and matching trades rather than using potentially slow blockchain infrastructure.

Advantages

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

Privacy: Private blockchains are primarily employed for privacy-related use cases in exchange for limiting communication together with the public. A hybrid exchange can safeguard a company’s privacy while still letting it to speak with shareholders.

Disadvantages

Low Volume: Hybrid exchanges simply have been around for a short period. They don’t yet contain the necessary volume to become go-to platforms for purchasing and selling digital assets. Low volume ensures they are an easy target for price manipulation.

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