HomeOPINIONDecentralized exchange versus Centralized exchange: Differences

Decentralized exchange versus Centralized exchange: Differences

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Lately, there has been an ongoing crusade in the cryptocurrency sphere among enthusiasts about asset custody. This crusade birthed the famous phrase Not your Keys, Not Your Coins. Without any secondary meaning, this phrase is as direct as it meant. The term underlines how the call for more adoption of a non-custodial wallet is gradually gaining momentum. Also, it emphasizes the need for why users and investors must have total control of their assets. In this regard, the crusade champions why cryptocurrency exchange must become more decentralized. Definitely, pushing for the extinction of centralized cryptocurrency exchange that has dominated the space over the years.

The collapse and crisis some cryptocurrency exchanges are facing due to the market situation have fueled the agitation. Generally, part of the cryptocurrency community believes the crisis wouldn’t have been severe or harsh on investors if they had total control of their assets.

Logically, the call emphasizes the libertarianism of cryptocurrency and how they perceive centralized exchange to be against the philosophy. Based on popular opinion, the tendency of centralized exchanges to be in charge of users’ assets is against the financial ideology crypto stands for.

In their argument, the cryptocurrency space is should be devoid of any issuing body or institution. Consequently, giving investors unlimited freedom and control over their virtual assets. However, based on this perception, centralized exchanges have gradually slotted into the position of institutional bodies. Subsequently, determining what will be or should be of users’ assets.

Explaining Decentralized and Centralized Exchanges

A centralized exchange is a platform where third parties are in charge of monitoring transactions and take charge of assets on behalf of users. Further, transactions on these exchanges are not tracked on the blockchain because of the presence of a third party. Notably, centralized exchanges are more popular because they offer various trading options.

Meanwhile, it requires a compulsory submission of users’ personal details for verification. Basically, the more information a user provides, the more the withdrawal limit increases. Examples of centralized exchanges are Binance, Coinbase, Kraken, KuCoin and many more.

Though, Decentralized Exchanges share similarities with their counterparts, only that it’s devoid of a third party. This implies that third parties no longer take custody of assets, leaving them on the blockchain with users as the custodian. Remarkably, DEX gives users the full autonomy to have their investments in their custody. Examples of DEX are Trust Wallet, Ledger, Meta Mask and Trezor.

Meanwhile, DEX allows peer-to-peer trading by utilizing assets, proxy tokens, and an escrow system. Overall, DEX offers more security than Centralized exchanges because of the autonomy given to each user. Therefore, it’s relatively impossible for users to lose funds to hacks simultaneously. This has been why the “Not Your Keys, Not Your Coins” campaign has intensified.

Not Your Keys, Not Your Coins

First, understanding the term comes with the comprehension of specific words in the Phrase. The most notable of the keywords in the phrase is “Key.” In cryptocurrency terms, the “Key” comes in two Dimensions, “Public and Private Key.” In this context, the Public Key means a Wallet address you can share with people to receive virtual tokens. Worth noting, that sharing this key has no implication on the funds in your wallet.

However, the Private Key is another Key connected to your Public Key (Wallet Address). Crucially, having this key gives ultimate access to the funds in your wallet, or let’s say, the public key linked to it. Basically, the Private Key is synonymous to a passcode that helps identify the owner of a virtual asset. Therefore, the “Not Your Keys, Not Your Coins” refers to the private key.

Connection of Keys to DEX and CEX

The connection between the phrase under view and crypto exchanges isn’t far-fetched. Centralized exchanges, like traditional financial institutions, have rules and regulations for their users. There are certain obligations a user must fulfill before having access to withdraw funds from these platforms. The prominent ones are withdrawal limits and transaction fees, which makes it evident that indeed, if “Not Your Keys, Not Your Coins.”

The mandatory fulfillment of specific obligations is a direct contrast to the freedom that comes with cryptocurrency. For instance, there are minimum and maximum funds users can withdraw at a go on centralized exchanges. Even centralized exchanges request charges before they process transactions. In fact, they owe the autonomy to deny users access to their funds if certain stipulations are not met on their platform.

It’s imperative to note that the phrase calls for more adoption of the total freedom DEX offers against Centralized exchanges. In that regard, Centralized exchanges are gradually offering users a unique package of Decentralized wallets. Mainly, to give them unlimited access to their virtual assets. Still, critics believe that adopting Decentralized Wallets will make it nearly impossible to regulate the cryptocurrency industry. On a fair ground, their argument is valid, leaving many with questions if indeed the sector can be free of a monitoring institution.

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