Simplifying Differences Between Exchanges
Decentralization is a common buzzword used to describe cryptocurrency exchanges. Bitcoin mining is a key part of decentralization in the crypto world. Centralization is the term to describe the traditional fiat exchanges. Decentralized and Centralized exchanges are related to Non-Custodial and Custodial exchanges.
Non-Custodial Exchanges- don’t hold or have custody of their users’ funds. Users have complete ownership and responsibility to keep their money secure.
Custodial Exchanges- hold multiple users’ funds. Users don’t technically have the custody of their funds and aren’t responsible for holding them.
What do decentralization and centralization mean in relation to exchanges?
- Decentralized Exchanges– The control of a decentralized exchange is distributed between all of the exchange participants. Blockchain technology is what makes modern functioning decentralized exchanges possible.
- Centralized Exchanges-The control of a centralized exchange is with one central entity. The traditional fiat and capital exchanges are examples of a centralized exchange. One thing a centralized exchange can do that a decentralized exchange cannot do is have a fiat.
How are these 2 types of exchanges related to custodial and non-custodial exchanges?
Custodial Exchanges typically occur on centralized exchanges. Binance, Bittrex, and GDAX are examples of some Custodial Exchanges that are centralized.
Non-Custodial Exchanges can exist on centralized and decentralized exchanges. Evercoin, Shapeshift and Coinswitch are examples of a Non-Custodial exchanges that are centralized. EtherDelta is an exchange that is both decentralized and Non-Custodial.
What are the pros and cons of the different types of exchanges?
Pros of Decentralized Exchanges
- The users have control of their order transactions
- No centralized power interfering with the execution of orders
- Complete transparency and record of all transactions
- They are not controlled by government entities
Cons of Decentralized Exchanges
- Users own the liability to protect their transactions from hackers
- Lack of customer service available to users
- Exposure to arbitrage and exchange abuse from users
- Vulnerability to miner frontrunning
- Slower order transactions
Pros of Centralized Exchanges
- Faster order transactions
- Customer service available for users
- Users don’t have liability to protect their funds while executing orders
Cons of Centralized Exchanges
- Exchange can experience unexplained outages
- Can be controlled by a government entity
- Users can be subjected to random exchange policies
- They can be hacked
Pros of Custodial Exchanges
- The exchange has the liability to protect the funds from hackers NOT the user
Cons of Custodial Exchanges
- The exchange NOT the user holds the money
- Custodial Exchanges hold the custody of your private keys
- Possible unannounced access to your money
- Support requirements are more complex
Pros of Non-Custodial Exchanges
- The user holds their money NOT the exchange
- User has consistent access to money
- Less complex support requirements
Cons of Non-Custodial Exchanges
- The user NOT the exchange has the burden to protect their funds from hackers
There is not one correct or best exchange applicable for every trader in the cryptocurrency space. Everyone needs to weigh the pros and cons accordingly to their individual preferences. People need to consider all aspects of the available exchanges.
We’ll be sharing more posts like these on cryptocurrency exchanges as we launch http://hybridblock.io, an exchange built to service all types of traders and their complex needs. Feel free to tweet to or follow @hybridblockhq on twitter.