It would make sense to first define both centralized and decentralized regarding crypto exchanges. A centralized exchange is one where the client would open an account and wire the funds to the bank account of the centralized exchange. The client would be able to trade whatever products are provided by the centralized exchange. If they wanted their funds, they would need to request a withdrawal, and the funds would be returned the same way they came in. The centralized crypto exchange model is similar to how stockbrokers, futures brokers, and forex brokers currently operate. Both rely heavily on the bank of the client and the broker.
A decentralized exchange is entirely different and for many a very new concept. The client of a decentralized exchange would hold their crypto assets in a secure “wallet.” They would transact directly with the other party. There are no banks used in the process, and the client does not need to keep their funds with the exchange.
The Custodial Question
There are some that would argue that even though the decentralized exchange doesn’t hold funds of the client. They are still a centralized “entity” that directs trades and still is liable for the transaction. With a decentralized crypto exchange, the client is responsible for the safety of their coins and if their wallet is accessed their coins are gone.
Hacking and Security
Centralized exchanges have been susceptible to hacking and attacks. Mt Gox is probably the most infamous attacks and one of the better arguments against the centralized camp. It comes down to the fact that centralized exchanges are a for-profit business that is providing convenience and simplicity for the client. This, of course, comes at a higher cost.
The Liquidity Question
One of the most significant differences between the centralized and decentralized exchanges is the access to liquidity. One of the biggest hurdles for the decentralized exchanges has been the access to adequate liquidity. Centralized exchanges like Binance and Coinbase have seen significant growth in their ability to provide liquidity to traders. Liquidity is critical to the growth an adaptation of the crypto market. The lack of liquidity in the decentralized model has many arguing that it will be nearly impossible to adopt a true decentralized crypto exchange model.
The centralized versus decentralized is an identity crisis for cryptocurrencies. Those who are bitcoin and crypto purists feel that governments and corporations cannot be trusted, and we must operate in a decentralized model that allows us to remain anonymous and keeps the government out of our crypto assets. The reality is that there is the need to identify individuals and to make sure that the criminal element is kept out. The truth is that there is a need to establish standards for exchanges to operate. Recently it was reported that crypto exchanges like OKex and Huboi were exaggerating their volume numbers by up to 90%. The integrity of exchange data is critical to the success of cryptocurrencies. Oversight of these crypto exchanges is a far better option than the complete alternative mistrust.