Custodial versus Non-Custodial: Exchanges

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Centralized versus Decentralized Exchange (source:blockgeeks.com)

Introduction

Cryptocurrencies (crypto) are a relatively new type of currency evolving rapidly in an increasingly tech-driven economy. They do not have an actual physical form, but rather exist in a blockchain on a server. They are not backed by banks or other traditional lending institutions, and transactions are highly encrypted to keep personal information private.

Crypto can be purchased, sold, or swapped on different types of cryptocurrency exchanges or on peer-to-peer marketplaces, like LocalCryptos. Once crypto is purchased, it is important to understand how this digital asset should be properly stored and how it can be securely transported or moved.

What is a Cryptocurrency Exchange?

A cryptocurrency exchange provides a platform for purchasing, trading, or swapping cryptocurrencies. There are generally two types of crypto exchanges: a Centralized Crypto Exchange (CEX) and a Decentralized Crypto Exchange (DEX). There is also a hybrid exchange which will be referred to as a Peer-to-Peer crypto marketplace, such as the non-custodial platform offered by LocalCryptos.

What is a Centralized Cryptocurrency exchange?

For example, a “centralized” cryptocurrency exchange allows buyers and sellers to exchange cryptocurrencies. These exchanges are described as “centralized” because they rely on a middle man or third party to process and manage transactions between buyers and sellers. All parties to a transaction rely on and must therefore trust this middle man to properly handle their currencies.

Centralized exchanges have suffered several security lapses in the past. For example, several centralized exchanges have been vulnerable to online hackers and have also had poor luck reacting to certain blockchain hard forks.

Centralized exchanges keep their systems off-chain, meaning they operate as collateral holders for their clients. Importantly, centralized exchange transactions are also not recorded on the blockchain. Such scenarios can cause security breaches and potentially unsafe storage of customer information, stored coins, and private keys.

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Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.