Centralized, Decentralized and P2P platforms

[un_rank]

These are concepts that are discussed often in crypto forums and it may seem easy enough to some, but could be confusing to others.
In this thread, I will try to explain the difference between Centralized, decentralized and Peer to Peer platforms.

Centralized platforms;
As the name suggests, centralized exchanges or platforms, popularly abbreviated to CEX are trading platforms which operate under a central authority or server.
They are designed for convenience as the central authority has full autonomy and operates the entire system on the backend, so matching buyers to sellers is relatively easier and faster.

Funds and data are all stored and managed by the central authority or owner.

Decentralized platforms;
In decentralized platforms, there is no central server or authority. They operate by smart contracts which are designed to mediate between trades and funds are not stored on the exchange but, traders can connect their non custodian wallets and get matched with other traders.

Peer to peer Platforms;
In this system, traders trade directly with each other, similar to the way bitcoin functions as seen on the whitepaper.
P2P trades can function without a third party or with one which serves as esrow. This could be a trusted individual or website.
we can also have a,
1. Centralized P2P platform, or
2. Decentralized P2P platform.

Pros and Cons;
Centralized exchanges,
- Typically require KYC submission, especially for higher trade amounts,
- They hold funds deposited and users can be victims of hacks,
- Higher liquidity for the popular platforms.
Decentralized exchanges,
- Typically do not require KYC submission,
- Do not control funds of users,
- Lower liquidity.

[JeromeTash]

Decentralized platforms;
In decentralized platforms, there is no central server or authority. They operate by smart contracts which are designed to mediate between trades and funds are not stored on the exchange but, traders can connect their non custodian wallets and get matched with other traders.

What you are describing here are just smart contract based exchanges that I don't consider decentralized. Remember a decentralized exchange called IDEX? Well now they require KYC 
Uniswap is now busy blocking users from certain regions

Bisq doesn't use smart contracts, but it's a perfect example of how a decentralized exchange should be.

[passwordnow]

Another cons for the decentralized exchanges is that they're prone to attacks. If the developers of it don't give much attention to the security, they're being targeted by hackers.
Although in both side there's always a hacking incident but it is that not just attacks but also abuse is mostly happening in dexes.

[LeGaulois]

Another cons for the decentralized exchanges is that they're prone to attacks. If the developers of it don't give much attention to the security, they're being targeted by hackers.
Although in both side there's always a hacking incident but it is that not just attacks but also abuse is mostly happening in dexes.

Statically, this is not true. Just search the web and count how many CEXs have been hacked and how many DEXs have been. If you do it, don't forget to include all the data breaches with CEXs that pop up on the web from time to time.
To penetrate a CEX you need to bypass the company's systems, whereas with a DEX you need to hack each participant individually. There has also been some research published pointing out how far from perfect the CEXs are in terms of security. Sometimes on basic things.

Centralized platforms;

Funds and data are all stored and managed by the central authority or owner.

In general, yes, but this is not always the case. A CEX does not always mean custodial, it can be a non-custodial if the private keys are not held by a third party (the company)

[tranthidung]

What you are describing here are just smart contract based exchanges that I don't consider decentralized. Remember a decentralized exchange called IDEX? Well now they require KYC  

Years ago, in previous bull and bear cycle, there is CryptoBridge that is a DEX but before they made a scam exit, they did two things.

• Require KYC on US users
• About 2 weeks or one - two months later, they require KYC on all users
• 2 - 4 weeks after that, they made scam exit but at least people still have chance to withdraw their coins in the given window time

DEX is not really decentralized if the founder, owner are all well known. Government can knock their doors and force them to do KYC or shut down their DEX anytime. Nowadays, it is super rarely to see a project initiated by anonymous team.

• Why KYC is extremely dangerous – and useless

[crwth]

After knowing this, what's next now after learning?

What's important is what they can do on their own with selecting the type of platforms they want and having to know why it's the best to use in the first place.

Centralized platforms are better when the platform is trusted, and there are features that it gives that centralized platforms offer.

• Being the middleman in P2P transactions
• Pay transfers from users can be done
• Promos and referrals can be utilized

I'm not sure what else, but mostly that's what I could think of at the top of my head.

For Decentralized Exchanges, it's the anonymity and not worrying about registering anymore, but that's mostly right? I haven't used much of DEXs, that's why I don't know a lot about it, but it's kind of hard if the asset you are trading is not that liquid. You have to pay a considerable fee to get your trade through.

[tranthidung]

Centralized platforms are better when the platform is trusted, and there are features that it gives that centralized platforms offer.

You are right about this. I know people talk about risk of CEX every day. "Not your keys, not your coins" that is true and on DEX you don't have your keys.

However, if you are choosing a big and trusted CEX, at least you are safe somewhat. Big exchange like Binance can spend their income from user trading fee in order to compensate their users in bad catastrophe like hacks, etc.

Importantly if we take the case of UST and LUNA into consideration. No big project, no big exchange can not collapse because it is too big.

Let's sum up like: "Don't store all your money on any CEX". The best is "Store your money in your own non-custodial wallet"

• https://cryptosec.info/nyknyc/
• https://kycnot.me/

For Decentralized Exchanges, it's the anonymity and not worrying about registering anymore, but that's mostly right? I haven't used much of DEXs, that's why I don't know a lot about it, but it's kind of hard if the asset you are trading is not that liquid. You have to pay a considerable fee to get your trade through.

When you are trading on DEX, with a token, you are facing with a potential rug pull if developers remove all liquidity.

So in this generation of DEX, it is not actually decentralized and because lack of regulations, it is risky to trade on DEX (rug pull). It's just my opinion.

[cryptoaddictchie]

Im doing both so I know the pros and cons in my own perspective.

Pointing that there are factors on both when choosing which one is better. Some will say dex are better and safer maybe their right. But the convenient and the feels of trading will be on cex and thats a fact. For sure many cex and dex users realize it. But we can always choose which one we should prioritize in terms of safety or more wider application. If you asked me, then dex is the suitable one, but I am not denying using centralized exchange is very easy anf quite friendly.

[passwordnow]

Another cons for the decentralized exchanges is that they're prone to attacks. If the developers of it don't give much attention to the security, they're being targeted by hackers.
Although in both side there's always a hacking incident but it is that not just attacks but also abuse is mostly happening in dexes.

Statically, this is not true. Just search the web and count how many CEXs have been hacked and how many DEXs have been. If you do it, don't forget to include all the data breaches with CEXs that pop up on the web from time to time.
To penetrate a CEX you need to bypass the company's systems, whereas with a DEX you need to hack each participant individually. There has also been some research published pointing out how far from perfect the CEXs are in terms of security. Sometimes on basic things.

Yes, I've realized that and said that both sides have always the hacking incidents. And what's more with the dexes are those abuses from the faulty system that they have.
As the hackers penetrate the dexes, when a bug is being found, they'll abuse it and that's one that I've read with many of those hacking incidents for the dexes.

[JeromeTash]

DEX is not really decentralized if the founder, owner are all well known. Government can knock their doors and force them to do KYC or shut down their DEX anytime. Nowadays, it is super rarely to see a project initiated by anonymous team.

• Why KYC is extremely dangerous – and useless

Worse still, if the "decentralized exchange" is just a smart contract based one of the so many shitcoin blockchains that are now modern day Ponzi schemes with all those yield farming schemes. For example the day Luna dumped, I was just wondering what was going on with their so called Dexes such as TerraSwap, Astroport etc

[Charles-Tim]

I think OP has almost covered all means of exchange but it still remain one which fall into the centralized category, but some people think it is decentralized because some function as means of exchange on noncustodial wallet, example are Changelley and  ChangeNow. This type of exchanges are Instant Exchanges, they are centralized.

- They hold funds deposited and users can be victims of hacks,

Users can also be a victim of website maintainance, no withdrawal of certain coins, account freeze and the likes. It is not user's private keys, it is not user's coin on blockchain.

[BlackHatCoiner]

You are right about this. I know people talk about risk of CEX every day. "Not your keys, not your coins" that is true and on DEX you don't have your keys.

In DEX you do have your keys.

However, if you are choosing a big and trusted CEX, at least you are safe somewhat.

Or you feel you're somewhat safe, but you're actually highly exposed. All this personal information, name(s), selfies, credit cards, bank transactions, drivers license, passports, physical address, other biometric data etc., encourage your identity theft. You're giving enough information to a stranger, who's provably going to sell it to other third parties or get hacked leaving all of your info to the black market. Now lots of other strangers, with worse intentions, can impersonate you.

Whatever isn't private, isn't safe either.

So in this generation of DEX, it is not actually decentralized and because lack of regulations, it is risky to trade on DEX (rug pull). It's just my opinion.

I don't know what's CryptoBridge that you've mentioned, but there are, indeed, completely decentralized exchanges. The most reputable? Bisq.

DEX is not really decentralized if the founder, owner are all well known. Government can knock their doors and force them to do KYC or shut down their DEX anytime. Nowadays, it is super rarely to see a project initiated by anonymous team.

That's true if the founder can control the DEX, which essentially means that it's not really decentralized. But, for a non-controllable and libre software like Bisq, it's considered decentralized. Same as with Bitcoin Core.

[jrrsparkles]

It will be good for the newbies to know more about p2p exchanges, localbitcoins and pax are the centralized p2p which almost operates as centralized exchange but let the users to share fiat funds with accounts of each other meanwhile decentralized p2p which lets users to trade via each other for both cryptocurrency and fiat both have their own pros and cons. But the real issues with popular p2p are requiring KYC which has different tier system and asking too much of personal details depends on how much limits we want to have.