Learn Academy Investment fundamentals: Strategies in practiceLesson 2: Choosing a Centralized or Decentralized Exchange

Lesson 2: Choosing a Centralized or Decentralized Exchange

After completing this lesson, you will be able to:

Understand the difference between centralized and decentralized crypto exchanges.

Name benefits and drawbacks of centralized exchanges.

Name benefits and drawbacks of decentralized exchanges.

Identify some popular centralized exchanges.

Identify some popular decentralized exchanges.

Welcome to lesson two in Kriptomat’s guide to fundamental investment strategies. This lesson is about centralized and decentralized crypto exchanges.

The most common place to buy cryptocurrency is at an online crypto exchange.

Exchanges let you swap everyday government-issued money for cryptocurrency.
Exchanges let you swap cryptocurrencies for each other and perform other financial transactions.
You can also convert your crypto back to conventional currency and withdraw it to your bank account or credit card.

There are two kinds of crypto exchanges: centralized and decentralized

A centralized exchange is run by a company. It provides tools, a professional development and testing team, and support resources to help you buy, sell, and invest in cryptocurrencies. A centralized exchange is likely to be regulated and compliant in every country where it does business.
A decentralized exchange, or DEX, is an application that lives on the blockchain. The creators are often anonymous. Transaction fees can be slightly lower, but the DEX offers little help and few guardrails to keep you safe. DEXs are fully automated and available 24/7.
A critical difference between the two is that centralized exchanges use your cryptographic keys to interact with the blockchain on your behalf. You have an opportunity to review transactions before committing to them, and if you lose your password, a centralized exchange can help you recover it. Centralized exchanges require identity verification and are governed by regulatory bodies in the countries where they do business.
With a DEX, you interact with the blockchain directly. If you are hacked, if there is a bug in the anonymous code, or if you lose your private key, you can lose all your cryptocurrency with no way of recovering it. Many DEXs operate outside of any country’s regulatory jurisdiction, and therefore no government agencies monitor their operations to ensure they are safe and fair.

Centralized exchanges have benefits and drawbacks.

Benefits include ease of use, safety, an all-in-one environment that includes investing tools, insurance of offline assets, recovery mechanisms for lost passwords, and responsibility for interacting with blockchains.
Centralized exchanges include slightly higher transaction fees, on average, though they cost less than banks and traditional financial services. They do quite a bit in terms of customer service, security, and other benefits to justify the modest costs..
In the early days of crypto, exchanges were targets for hackers who sought to compromise many wallets at once. But that was years ago. Centralized exchanges have hardened their defenses since then, storing customers’ private keys offline with military-grade security. Today they are much less likely to be hacked than decentralized exchanges.

Because they come from established companies, centralized exchanges like Kriptomat provide expert customer support in local languages and establish compliance and customer-protection teams to ensure your invested funds are safe.

Dexs have benefits and drawbacks too

Benefits of DEXs include freedom from government oversight and slightly lower transaction fees. Crypto owners retain possession and control of their blockchain keys.
Disadvantages of DEXs include potential poor scalability, bare-bones user interfaces, and the inability to purchase crypto with conventional currency or receive conventional currency after selling crypto. According to researchers at Crystal Blockchain, DEXs were 20 times more likely to be hacked than centralized exchanges during the first half of 2022.
Because the team behind a DEX is anonymous, you can never be sure it’s not a couple of teenage hackers slapping together code that is too sloppy to be secure or that embodies deliberate hacks.
In any case, the lack of support and documentation, coupled with the risk of losing irreplaceable blockchain keys, makes decentralized exchanges unsuitable to newcomers to the crypto world.

So – what did we learn?

Crypto exchanges are online platforms where cryptocurrency is bought, sold, swapped, and stored.
Decentralized exchanges give you maximum control but offer little support, training, or hand-holding.
Centralized exchanges typically are more secure and more compliant with government regulations.

That’s the end of this lesson! Test your understanding and earn points toward a Kriptomat Academy certificate of achievement by taking the test!

Which of the following is a true statement about centralized exchanges?

Developers are anonymous, known at best only by their user names at a code depository like Github.

Centralized exchanges require you to keep track of your blockchain private and public keys. If you lose them, your funds could be impossible to recover.

Centralized exchanges are operated by decentralized autonomous organizations (DAOs).

Centralized exchanges keep track of your blockchain keys and handle interactions with the blockchain on your behalf, providing enterprise-grade security for your data and funds.

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Which of the following is an advantage of decentralized exchanges versus centralized exchanges?

Decentralized exchanges have better ease of use, especially for newcomers to the crypto world.

Decentralized exchanges tend to have slightly lower transaction fees.

Decentralized exchanges use government-mandated know-your-customer procedures to ensure that all users are legitimate, making the exchange safer for all.

Decentralized exchanges run on a 24/7 basis, not just during banking hours as centralized exchanges do.

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Which of the following is a true statement about DEXs?

Distributed exchanges are custodial, meaning that they handle your private keys and all your blockchain interactions.

DEXs typically do not require customers to complete identity verification to protect customers from fraud.

DEXs charge higher transaction fees than conventional exchanges because of the cost of smart contracts and software development.

Because they don’t store cryptographic keys for user accounts, DEXs are almost never targets for hackers.

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Which of the following is NOT a centralized cryptocurrency exchange?

Jupiter

Gemini

Coinbase