Introduction

There was a major bull run in 2017 which saw good returns on investment in altcoins. There was also a boom in Decentralised Finance (DeFi) in 2020, these events attracted many people to the world of crypto currency. This made it imperative for the development of new and innovative crypto exchanges which are being marketed as solving the needs of everyone in crypto trading, both new and old.
Some of these new exchanges are centralised exchanges and they pose some for teeming investors. Millions and Billions of dollars has been lost due to sophisticated hacks and scams, and they have caught the eye of regulators who are now regulating them which has an impact in user privacy in the process. This is one of the foundations of decentralised exchanges, and they are beginning to grow in popularity in recent years.

What is a Decentralised Exchange (DEX) ?

Decentralised exchanges or DEXs are exchanges that allows buyers or sellers of a crypto asset to trade on it without having to give up control of the funds put into the exchange to the owners of the exchange.
This is very different from a centralised exchange because users of these exchanges hand over their funds, assets to the control of the exchange which acts as custodians and therefore issues IOUs for users to trade with them on the platform. At the preliminary developmental stage DEXs where created to remove the need for any custodian, authority to supervise and approve trades made within a certain exchange. However with the help of smart contracts, DEXs operate automated order books or automated market makers and trades. This is what makes them peer-to-peer.

How Does a Decentralised Exchange work?

There are different types of Decentralised exchanges, and they can be divided into three categories:

On-Chain Order Books:

These are DEXs that use on-chain order books, that is, they employ the use of nodes on the blockchain to maintain the record of all orders. As with most activity on a blockchain, they require the operation of miners to confirm each transaction. Examples in this category includes but not limited to Bitshares and StellerTerm exchanges.

Off-Chain Order Books:

Unlike those of an on-chain order books, off-chain order books transaction records are stored in a centralised entity. They use what is termed as "relayers" to help manage those order books. In the light of this, off-chain order book DEXs are mainly quasi-decentralised, unlike other types of DEXs.
Examples of off-chain order books includes Binance DEX, 0x and EtherDelta.

Automated Market Makers (AMM):

In automated market makers you don't need utilise order book. Rather, they make use of smart contracts to form liquidity pools that execute trades automatically based on certain parameters. These were the drivers of the DeFi boom, and are used by popular platforms such as Kyber Network, SushiSwap and Uniswap.

Advantages and Disadvantages of Decentralised Exchanges

Due to the common problems facing centralised exchanges, decentralised exchanges have been given good remarks based on their privacy, stronger security and greater user control they offer to owners of digital assets.

Advantages of DEXs

Security:

Due to the custodial nature of centralised exchanges, they are usually susceptible to attacks by hackers and thieves. This is so because they have to maintain liquidty by keeping the funds of users on their platform. Breaches of security on centralised exchanges like Coincheck, Mt. Gox etc have rocked the crypto industry and seriously eroded public's trust.

But DEXs have a low affinity to security risk, since users of these platforms can trade on them using either a cold or hot wallet, without needing their private keys or recovery seeds. Importantly it would not be easy for hackers or thieves to steal funds from the networks because it would be too costl and difficult.

Privacy:

Most centralised exchanges require you to sign-up with them in order for them to comply the Know Your Customer (KYC) requirements. As its the nature of all centralised system, users are giving up their personal data to the exchange operator.

DEXs don't use this method. Because they are not maintained by the central structure, no need for any KYC protocol. This brings about privacy when using DEXs to trade.

Sovereignty:

In a centralised exchange, users data such as their information and funds are stored and being controlled by the exchange.

DEXs allows you to have contol of you funds and they can be exercised freely. Users have full custody of their funds and can use them as they like.
Concerns like freezing of assets or blocking of withdrawals by centralised exchanges rarely happens in DEXs.

Disadvantages of DEXs

Even though Decentralised Exchanges are exciting and give users full autonomy of use, they have their own short comings.

Transaction Speed:

To process an order takes time on DEXs and this is due to trading calls being broadcasted first to the blockchain network, and then be confirmed by miners before being processed. This makes it easy for DEXs to suffer from 'price slippage' where a transaction doesn't execute at the time of order due to changes in the values of the cryptocurrencies.

Liquidity Issues:

Centralised exchanges have high liquidity due to their popularity, this is so because centralised exchanges have large numbers of users.
DEXs on the other hand have low user currently, which makes liquidity to be on the low side. They don't often have access to any fund that they can move around to make trades happen.

What is a Centralised Exchange (CEX)?

A Centralised Exchange (CEX) helps to process trades between users on the platform by maintaining an order book. An order book is a collection of buy and sell orders made by traders. These orders are requests made by traders to buy or sell a specific cryptocurrency at a certain price. CEXs get these orders from their users and then use a specific software to match and execute buy and the corresponding sell orders.

In a CEX trades which occurs between users is not between crypto or fiat currencies. What happens is that when users deposit funds onto the exchange, the exchange takes control of the funds and issue a corresponding amount of IOUs to the trader. Then the exchange tracks every user's IOUs inwardly as they execute trades and only converts them to real currencies at the time of withdrawal of funds.
However, CEXs relies on a central entity and this leads to some drawbacks. Centralised exchanges do let users know how they operate inwardly, this means lack of transparency, and this can enable malicious practices such as wash trading and price manipulation.

The widespread mode of operation on an exchange is the CEX. This is due to speed of transactions and cost-efficiency of processing the transactions through a single point of authority. This makes it a convenient venue for day traders and crypto enthusiast to purchase as well as sell crypto.

Because CEXs have control over users' asset, it makes them susceptible to potential attackers from both within and outside the organisation. These attacks coupled with technical issues such as server failure, can lead to significant downtime of CEX services, which leads to loss of opportunities in trading for users. CEXs can also be used in government censorship, with makes the regulators to freeze or seize a user's fund and force the exchanges' company to reveal the personal information of the user.

Differences between a Centralised Exchange (CEX) and a Decentralised Exchange (DEX)

We can see that there are things which makes a centralised exchange different from a decentralised exchange. This is a holistic view of the difference between a centralised exchange and a decentralised exchange.

1. Control:
In a centralised exchange information and users asset are controlled by the exchanges.
Because of the enhanced complexity of decentralised exchanges, all control belongs to the users.

2. Security:
Because of the nature of centralised exchanges, they are more prone to attacks on their servers and hacks by hackers. They can hack the authority whose has the private key to access the funds of all users, this means that you can lose all your deposits and gains.
Decentralised exchanges are more secure because information and funds are stored on many servers which makes it unlikely to be attacked or hacked.

3. Fees:
Centralised exchanges collects fees for services rendered, depending on the provider and according to the features of their platform.
DEXs have zero charges or they are very minimal.

4. Features:
Due to the popularity and use of CEXs, they have more features such as margin trading, tools for management of portfolio, use of advanced order types to help trade better.
In a DEX most of these features are not available yet. But as the market expands more and more advanced and sophisticated decentralised platforms would enter the market with better features.

5. Popularity:
CEXs are more popular than DEXs because they entered the market first. But decentralised exchanges have peculiar advantages over centralised platforms with respect to wallets and acounts. Also CEXs offer better infrastructure and liquidity. But i believe as more DEXs enter the market, there would be an increase in its popularity.

6. Liquidity:
Due to the enormous amount of users, centralised exchanges have more liquidity as users make orders based on market trends. Therefore if an asset is in high demand, various users will purchase or sell it accordingly. Also the influence of market makers makes CEX platforms to have more liquidity.
DEXs don't have as much liquidity, and on major reason is because orders takes time to process. This could also factor in to their low popularity.

7. Speed:
Decentralised platforms are very slow when compared with centralised platforms. While it takes an average of 10 millisecond to execute orders on a centralised platform, it takes a minimum of 15 seconds to execute an order in a decentralised exchange, according to this analysis.
Also in a decentralised platform a user can take up to a minute to complete an order, this is deemed surplus time on a CEX.

8. Regulations:
In centralised exchanges licenses are required and they have to be subject to local regulatory rules in a particular region. On the other hand, you don't need to do so because of it distributed nature, thanks to blockchain. This means that even if crypto exchanges are banned in a particular region, decentralised ones can still operate in those regions.

Two Best Centralized Exchange of 2021

Instaforex platform
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I like using the Instaforex exchange because they have a very fascinating user interface, every tool necessary to perform any trading action is available. They have a lot of liquidity and volume on their platform. Spot trading is very easy and simple to accomplish.

Binance platform
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These are the things that make me like Binance
They have some of the best coins featured, they have high volume and liquidity because a lot of people are using it, their user interface is very easy to navigate, they have a peer-2-peer market, Security is reliable.
spot trading is very easy and fee very low.