Crypto Exchange Comparison
Pros and Cons of Centralized Exchanges
Centralized exchanges are often the first point of contact most people have with the crypto world, and it makes sense—users can trade in fiat for crypto under a streamlined and unintimidating interface. Many of the biggest names in centralized exchanges have successfully connected ordinary people to highly complex concepts and projects.
PROS of CENTRALIZED EXCHANGES
- Liquidity: Consistently high liquidity
- Volume: Centralized exchanges still account for the vast majority of trading volume
- Speed: Fast transaction speeds on centralized exchanges contribute to better user experiences as well as enable complex trade types
CONS of CENTRALIZED EXCHANGES
Ironically, many of the same factors that contribute to the advantages of a centralized exchange also contribute to the disadvantages.
- Custody: Entrusting an exchange with your private keys means you don’t fully control your own money.
- Security: Because they hold a large number of assets, centralized exchanges are a prime target for bad actors. The most notorious exchange hacks were aimed at centralized exchanges (e.g., Coincheck, Mt. Gox, BitGrail, NiceHash, and Bitfinex).
- Manipulation: Several centralized exchanges have been accused of manipulating their opaque nature and conducting insider trading, fake volume, and price manipulation.
Pros and Cons of Decentralized Exchanges
Decentralized exchanges can greatly differ when it comes to technology, trustlessness, security, legal implications, and more. However, they share the same goal of resolving the flaws seen in centralized exchanges.
PROS of DECENTRALIZED EXCHANGES
- Custody: Traders don’t need to relinquish control of their private keys to transact
- Security: The majority of decentralized exchanges employ some form of distributed hosting, minimizing risk of infiltration and attacks,
- Listing Diversity: At the time of writing, there are nearly 2900 cryptocurrencies with many alt coins only accessible through decentralized exchanges.
CONS of DECENTRALIZED EXCHANGES
On-Chain/Off-Chain Order Books
The earliest decentralized exchanges took the term most literally, building fully on-chain models in which all orders interact directly with each other. While this achieves extensive decentralization, it makes every transaction expensive and slow—from placing an order to modifying or canceling an order—as everything incurs a network fee and wait time as transactions mine.
A new class of DEXs iterated on the early designs by taking the order book off-chain. In these new systems, market makers broadcast an order off-chain to be picked up by a counterparty who then passes the full order to a smart contract for fulfillment. While these systems create fewer transactions on-chain, they still lead to multiple user experience issues including:
Front Running - Because every order gets submitted to the blockchain, anyone can see a transaction before it gets mined. This visibility leaves every trade susceptible to interception as front runners can pay a higher gas price to incentivize the network to mine their transaction first.
Trade Failures - Because the blockchain only reflects transactions after they are mined, there are many times where a limit order is both visible on the order books and pending execution and settlement. Users are unaware, leading to multiple attempts to fill the same order and network-level failure for all but the first trade to mine successfully.
Expensive Cancellations - Cancelled orders must be validated on-chain, adding additional expenses to the process of updating orders. The result is market makers, who incur extreme costs from constantly updating orders, setting higher spreads and worse pricing.
Order Type Limitations - Users cannot create more complex orders that rely on assistance from a third party, such as stop-loss.