An exchange is an organized market where tradable items are bought and sold. In the world of cryptocurrency, there are online exchange platforms where people can trade different types of cryptocurrency or fiat currency. Decentralized exchanges are what make cryptocurrency truly desirable for those that want a system that doesn’t use a third party intermediary between a buyer and a seller.

Centralized Exchanges vs. Decentralized Exchanges

The best way to understand decentralized exchanges and why they are desirable for cryptocurrency is to compare them to centralized exchanges.

Centralized Exchange: A centralized exchange like Coinbase, Mercatox, etc., centers on a third party that matches two parties that want to transact with each other. The third party holds the funds. These centralized exchange centers have many rules that each party must conform to in order to participate, such as “know your customer” regulations and anti-money laundering laws. This third party becomes the authority on the transaction and if parties don’t meet their requirements, they cannot complete the transaction.

Decentralized Exchange: Unlike a centralized exchange, a decentralized exchange like ForkDelta is a platform that is established directly between both parties. There is no third party to set up rules of trading. Instead, the trade takes place using an automated process. Because there is no central authority on a decentralized exchange, there is no storage of personal information like names or account balances, so parties can keep everything private.

A Look at the Pros and Cons of Each Exchange

There are many pros and cons when it comes to choosing which type of exchange to use. At the end of the day, it’s up to the individual user to decide. Often, it comes down to personal preference and comfort level. Often, people will use a mixture of both, because they appreciate the benefits of each.

Centralized Exchange Benefits:

Centralized Exchange Drawbacks:

Decentralized Exchange Benefits:

Decentralized Exchange Drawbacks:

In summary, centralized exchanges are used by those who may be new to cryptocurrency and want more centralized services. Decentralized exchanges are preferred by users with cryptocurrency trading experience who want the anonymity associated with it.