The meaning of decentralized is “to move the control of an organization or government from a single authority to multiple authorities.
To understand decentralization in Technology is different from decentralization in ways how government or an organization operates.
Decentralized means something that is not centralized. E.g. anything that is controlled by single individual or authority is considered centralized, think of it like a small organization or a company with CEO. All the important decisions are made by one individual. But, if organization was decentralized then according to the experience and expertise of each individual they will be able to decide the fate of the company.
There is no common definition of decentralization as more and more research has been going on in this field. People are more used to centralized way of doing things.
All major cryptoexchanges are centralized. Centralized exchanges have single point of failure, meaning if one server is hacked then personal information of all the account holders is compromised. As you know what happened to Mt.Gox and many other exchanges – all these hacked exchanges were based on centralized model.
Bitcoin was the first decentralized cryptocurrency that was held electronically and that allowed people to transfer value between them without trusting the third party. But, problem comes when people use decentralized currency on centralized exchanges. Both of these models totally differ from each other.
Even though centralized exchanges are easy to use and offers advanced options like placing orders in advance, margin trading etc but with this ease and advance options comes security issues as happened in the past. Even though some exchanges are better protected than other but nobody can give you guarantee that your data is safe with them.
So, the question is how to trade cryptocurrency with interested buyers and sellers without putting all your savings at risk? The answer lies in decentralized exchanges.
What is a decentralized cryptocurrency exchange?
Decentralization is about distributing functions and powers to many instead of giving it to any one. On decentralized exchanges your personal information, wallet information, funds etc does not save with a third party.
Decentralized exchange is based on peer-to-peer(p2p) model. The trade doesn’t go through central server before being processed. As buyer’s and seller’s requirements are met the order is executed.
On decentralized exchange the order is processed between two parties without involving any third party.
What are the benefits of decentralized cryptocurrency exchange?
One big benefit of the decentarlized exchanges that centralized exchanges cannot offer is the trustless nature of decentralization where there is no need to trust any party with your personal information such as name, date of birth, bank account, wallet info, private keys etc
You are not held at the will and honesty of the exchange.
The hosting of a decentralized exchange is p2p meaning every node, computer or participant is helping to maintain maximum uptime to keep the system online and run flawlessly.
Centralized = Exchange controls your funds, private keys
Centralized = Exchange have your personal info
Centralized = Server Downtime
Centralized = Single point of failure
Centralized = Can be hacked
Decentralized = You control your funds and private keys
Decentralized = You maintain anonymity
Decentralized = Not prone to hacking
Decentralized = No downtime. Maximum uptime
What are the disadvantages of decentralized exchanges?
At the moment, If security and protection of personal identity is a plus of decentarlized exchanges then centralized exchanges have other plus or advantages.
Centralized exchanges offer ease of use, advanced options like margin trading, stop loss, lending etc while decentralized exchanges are limited to basic options like setting order to buy or sell. In the decentralized exchange you need to be online for your order to be processed but with centralized this can be processed even when you are not online.
Centralized exchanges have higher liquidity meaning there will always be someone to buy your coins and somebody you can buy coins from.
Centralized = Ease of use
Centralized = Advanced Options
Centralized = High liquidity
Decentralized = Difficult in use
Decentralized = Basic features
Decentralized = Low liquidity