When Sakotoshi Nakamoto came up with the concept of Bitcoin he emphasized heavily on decentralization. Neither Bitcoin nor any other cryptocurrency would have been that popular if they did not promise something the 21st-century kids want – independence. Sakatoshi painted a world where money is distributed peer-to-peer without the need for mediators. This idea touched our romantic hearts for a couple of reasons. It came to life in a moment when the 2008 economic crisis was at its peak. At this point, a great number of people had already lost their hard earned money. As you remember, the banks did not offer much safety back then.
Then all of a sudden we had this concept that there might be a currency that can be distributed over tremendous distances without the need for a bank. Needless to say, the idea that this currency is completely independent of the traditional financial system only made it even more viral. I dare to say that if it hadn’t been to this utopian world Bitcoin painted, cryptocurrencies would never have become what they are today.
Bitcoin has been around for almost ten years now but it only made it to the headlines last year. Why? Because its price tripled several times almost topping $20k in December 2017. But I have a question for you, do you think it would have been that huge if the crypto enthusiasts strictly stuck to decentralization? Sorry, but I am not buying that. Decentralization made people love crypto but centralization made them trade it. What I am trying to say is, decentralized and centralized exchanges played crucial roles in the evolution of cryptocurrencies.
For the uninitiated, a decentralized exchange (DEX) is a place where traders directly trade with each other. Simply said, Joe sells bitcoins straight to Sara and no one controls or monitors the process, apart from the blockchain itself. There is no governing body and traders remain completely anonymous. We can assume that DEX are in line with Satoshi’s vision on crypto finance.
Decentralized exchanges are important because they started it all and they are still the first choice for experienced cryptocurrency traders for a couple of reasons. First of all, since all the information is spread among the participants DEX are practically incorruptible. There is no single place or server if you like that stores all the bitcoin, all the Ethereum and so on. This makes life harder for hackers because they cannot corrupt the whole system, meaning your funds are safe. Though decentralized exchanges offer great security they are not completely protected. Hacker’s can still hijack traffic and direct reckless users to copycats websites and steal one’s public and private keys.
There is one big disadvantage of DEX, however. They are usually hard to use due to the poor user interface. Plus, they require more knowledge and patience compared to their centralized counterparts. In contrast, newbies want to quickly buy some tokens through their smartphones. Even better, if payment options include VISA or PayPal. Unfortunately, decentralized exchanges not always offer that, because if they did they will have to operate with personal data, something the whole cryptocurrency concept is against. That being said, one can only trade on DEX by depositing tokens from a wallet in another exchange, hardware or desktop wallet.
Why do we need centralized exchanges?
First and foremost, they are plain easy to use, they are user-friendly and they are convenient AF. Centralized exchanges account for the greater part of the cryptocurrency trading volume, just because they offer unmatched user experience backed with simple apps available for both iOS and Android. What’s more, one just have to deposit some fiat via VISA or PayPal and they are ready to jump into the crypto ocean. Yes, it is that easy and people dig it.
Nevertheless, centralized exchanges have their drawbacks as well. They have to comply with know-your-customer policies and anti-money-laundering laws, meaning they under the strict control of the regulators. That’s why crypto enthusiasts don’t dig them. They are the epitome of what cryptocurrency stood against in the first place. In addition, they are vulnerable to hacker’s attacks. That’s we it’s advisable to store your funds in cold wallets and never leave your tokens in a centralized exchange.
However, we need them because they are the main source of fresh money entering the market. Even little kids know that without fresh money the market will stop growing and would eventually die. Furthermore, they offer liquidity and last but not least they are the advocates of the worldwide bitcoin adoption.
Didn’t we all want to use cryptocurrencies as a payment method? We did and we still do, that’s why we need both types of exchanges. Ditch one of them and the market will crash in no time.