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Advantages of Centralized Exchanges:

Simple and convenient to use, suitable for beginners.

Fast transaction speeds.

Generally regulated, providing an additional layer of protection.

Secure identity verification (KYC) process.

Withdrawal of assets requires waiting for approval.

What is a Decentralized Exchange (DEX)?

Decentralized Exchanges (DEX) operate without a specific organization or institution. All trading services and rules are embedded in smart contracts and executed through code.

Users mostly do not need to undergo identity verification to join, and personal assets must be managed independently.

In DEXs, users don’t need to deposit or withdraw cryptocurrencies in advance and can directly engage in peer-to-peer (P2P) transactions with other users’ wallets. Orders are directly matched between buyers and sellers and transmitted through the blockchain network, making all transaction records publicly transparent, immutable, and anonymous.

Types of Decentralized Exchanges:

Order-book trading, similar to centralized exchanges, uses a bidding model to complete transactions.

Liquidity pool-based trading, the mainstream model in DEXs, completes transactions through Automated Market Makers (AMM).

AMM eliminates the need for order makers or takers, transforming traditional order-book trading into liquidity pools. All traders can complete transactions without corresponding orders, significantly increasing efficiency. Providers of liquidity also earn transaction fees and governance token rewards.

This approach, which regulates supply and demand balance through trading volume, breaks away from the traditional intermediary-based order matching, turning every participant into a ‘liquidity provider.’ Users can lend their cryptocurrencies to the liquidity pool and earn transaction fees as a return on the lent funds.

Advantages of Decentralized Exchanges:

The logic and process of buying and selling are transparent. All trades are direct on the blockchain, and benefits like transaction fees and spreads can be shared with all participants through smart contracts and algorithms.

Users can query and directly control their asset status on the blockchain, avoiding the possibility of opaque trading.

Disadvantages of Decentralized Exchanges:

High transaction fees, as all trades are on the blockchain. Any on-chain action requires a fee, especially during network congestion or when using on-chain order books, deterring many users.

If assets are poorly self-managed, they can be entirely lost. DEX users must manage their assets, placing significant emphasis on wallet security. Lack of knowledge in secure wallet and private key management, or forgetting one’s private key, can lead to irretrievable asset loss.

No regulatory authority permissions, leading to numerous security risks.

Finding a Balance Between Centralized and Decentralized Exchanges:

Centralized exchanges play a key role in matching cryptocurrency buyers and sellers. Without them attracting a large global user base, cryptocurrency liquidity and popularity might be low, making it difficult to agree on a reasonable asset price.

In their early stages, DEXs not only had slow transaction speeds and low liquidity, but their user experience was also inferior to that of centralized exchanges, mainly attracting experienced cryptocurrency users.

Both types of exchanges have their respective strengths and weaknesses. Finding a balance between centralized and decentralized systems is a future direction for the cryptocurrency financial sector.

Whether new or seasoned in cryptocurrency investment, understanding the operating mechanisms and technological developments of exchanges is crucial. In choosing the right exchange for investment, we can collectively oversee the development of relevant technologies, advancing towards a safer and more ideal cryptocurrency ecosystem.