Centralised or Decentralised: How do you balance the risk?
Centralized (CEX) and decentralized (DEX) exchanges are just one of the plethora of personal battles that influence choices within the cryptocurrency space. But what are the differences between the two? What are the pros vs cons that will need consideration before you commit to your preferred trading platform?
Centralised exchanges operate via a custodial framework by way of holding your crypto assets where all trading is completed through a 3rd party or intermediary. Until withdrawal of assets, the custodian, which in this scenario would be the exchange, will have control of said assets.
A decentralized exchange essentially functions on a non-custodial basis; governed by the community that uses the service. This mechanism allows for the owner to maintain proprietorship of assets and seed phrases.
Ultimately, any decision as to which exchange is the right one or which exchanges are best suited for particular users goes much beyond the fundamental differences between centralised and decentralised. User experience, security, privacy, support, and trading pairs are just some of the key elements to consider.
It is a general consensus that centralised exchanges employ a far easier platform to navigate and that can have huge appeal to new and seasoned investors. This usability is improved in most part by the inclusion of customer support and/or a point of contact where DEX does not. However, decentralised usability has improved enormously since the launch of Uniswap, which proved to be a catalyst for DEX adoption. The popularity of decentralised exchanges continued to be amplified through Pancakeswap on the Binance blockchain. The collective 2021 volume of DEX suggests that DEX adoption for cryptocurrency trading will continue to grow into 2022.
Risks associated with cryptocurrency are well documented. By association, the exchanges used will carry most of this danger. 2021 saw a record number of reported scams and exchanges, for all their security, fell victim to a sizeable proportion of these reported scams.
Well-established Centralised exchanges attempt to mitigate some risk by implementing stringent project listing and user protocols by way of KYC (Know your customer). Nevertheless, the storage of information and assets in a single server makes a centralised exchange susceptible to malicious activity. 2022 has already seen an established CEX attacked, and we are sure to see more similar attacks in the coming months.
DEX by its very nature would not be at risk from this type of malevolent activity, however, this in the main part gives way to personal scams or project fraud. The lack of identification, KYC protocols, or vetting allows for the launch of projects that may incorporate specific code to allow for draining of liquidity or restrictions on selling. Proof of audits can mitigate this, but this alone should not guarantee the security of a defi project. In addition to the obvious risk outlined, decentralised exchanges require the user to secure seed phrases, and any loss or unauthorised access of these details, will in most cases, mean the loss of personal assets. The simplicity of a seed phrase and access will also create an opportunity for unhindered access to assets should the key information be shared unwillingly.
The final key difference to consider would be what assets you hold and what your intentions are?
CEX allows for trading with Fiat currency (Eur/USD/GBP etc.), and in many cases, seamless connection to retail banks or PayPal to withdraw funds. Furthermore, trades can be scheduled to allow maximum control over an individual buy/sell trading pattern throughout the day without needing to be present. This freedom of asset control will come at a cost by way of trading fees payable to the CEX exchange.
DEX is P2P trading with other cryptocurrencies and withdrawal of funds to a bank/PayPal is not currently possible as this needs to be done by converting to a FIAT currency. It is generally accepted that money from a connected wallet to DEX exchange would transfer funds to a CEX to then withdraw to a preferred bank etc. This will incur a fee.
Since cryptocurrency adoption is growing at an exponential rate and the use of an exchange, either CEX or DEX is required to facilitate trades or purchases. The question remains, what risks are users willing to take? Does the perceived additional security of centralised trump that of anonymity offered by decentralised exchanges? Is the fear of personal or project fraud on DEX greater than the industrial attacks on centralised exchanges?
Verify will repeatedly encourage investors to DYOR on both projects and exchanges. Evaluate the risks versus benefits and if neither option is worth the risk, invest in a hardware wallet such as Ledger that allows storage of crypto assets offline and remains secure.
