Centralized Exchange

One of the most important tools for users when it comes to transacting.

Centralized cryptocurrency exchanges are online platforms that are used to buy and sell cryptocurrencies. They are the most common and used means for investors to buy and sell cryptocurrency holdings. Though some investors may find the concept of "centralized" exchange to be somewhat misleading, because digital currencies themselves are often advertised as "decentralized". When you are looking at the term "centralized cryptocurrency exchange" the idea of centralization refers to the use of a middle man or third party to help with the transactions. The buyers and sellers all trust this middle man to handle their assets. Which we most commonly see in current bank setup, where the client trusts the bank to hold his or hers money.

The reasoning behind this setup is because banks offer the clients security and monitoring that an individual would not be able to accomplish on his or her own. But in the case of a centralized cryptocurrency exchange, the same principle applies. The transactor must not only trust that the exchange will safely complete their transactions for them, but also that it will make use of the network of users in the exchange in order to find trading partners. When it comes to cryptocurrencies, which are for the most part stored on a digital wallet, an individual can lose hundreds or even thousands of dollars worth of digital currency holdings simply by just forgetting the key to their wallet. An exchange will not allow this type of situation to happen, as it safeguards the holdings in place of the individual investor.

Centralized exchanges can be used to conduct trades from fiat to cryptocurrencies or vise versa. They can also be used to conduct trades between two different cryptocurrencies. But there is still a market for another type of cryptocurrency exchange as well.

These centralized exchanges make up a vast majority of the trading volume in the cryptocurrency because they are regulated entities that custody users funds and also offer easy to use platforms for the users. And some even offer users insurance on deposited assets.

Decentralized exchanges on the other hand are an alternative, they cut out the middle man, generating what some like to think of as a "trustless" environment. These type of exchanges function as peer-to-peer exchanges. The users assets are never held on to by a escrow service and the transactions are done entirely by smart contract and atomic swaps.

The important difference between these two is weather or not the third party/middle man is present. Decentralized exchanges are less widespread and not as used when it is compared to centralized exchanges. Still there are more decentralized all the time and there is still a possibility of them giving centralized exchanges a run for their money in the future.