Americans devote a higher share of their purchasing power to crypto than in nearly any other country, according to a recent report from Chainalysis. The report, which investigates global crypto adoption, also showed that U.S. cryptocurrency transaction volume is on the up.
Which platforms are most popular? There are several top cryptocurrency exchanges in the U.S., but what’s interesting is that it’s a decentralized exchange (DEX) that recorded the highest transaction volume.
Uniswap edged out centralized exchange Coinbase to take the crown. Both recorded over $100 billion in transactions between July 2020 and June 2021.
- According to the report, the three most popular centralized exchanges in North America are Coinbase, Gemini, and Binance.
- The biggest decentralized platforms by transaction volume are Uniswap, dYdX, and Compound. Compound is a lending platform rather than a DEX.
Decentralized vs. centralized exchanges
If you’re wondering what the difference between centralized and decentralized exchanges is, you’re not alone. Put simply, when you use a centralized exchange, there’s a middleman involved to facilitate the trade — it uses an order book system that’s similar to a traditional stock broker.
A decentralized exchange allows users to swap tokens with no intermediaries. For example, Uniswap does not need to involve a centralized party in its trading. It’s done through something called an automated liquidity protocol, where investors are rewarded for adding liquidity, and that liquidity means there are tokens available for traders.
Uniswap also has a governance token (UNI) which is used to reward users and make decisions on the platform.
One thing to watch out for if you’re a regular DEX user is upcoming regulation. The anonymous nature of DEXs means authorities are concerned these platforms could be used to launder money or finance terrorism. As U.S. lawmakers consider stricter cryptocurrency regulation, decentralized exchanges may bear the brunt of new rules. Uniswap is already the subject of an SEC probe.
From a user perspective, here are the main differences between centralized and decentralized exchanges:
Getting the right crypto wallet
One key idea that’s worth exploring in more detail is the difference between a custodial wallet and a non-custodial wallet. A crypto wallet is a place where you store the keys to your cryptocurrency. Your private cryptocurrency key is like a PIN to access your bank account, it’s a password that controls access to your assets.
Most centralized exchanges keep your crypto in a custodial wallet, which means it controls your crypto keys. If the platform gets hacked, for example, you could lose your funds. The exchange also has the power to freeze your account and could be susceptible to outages.
If you use a non-custodial wallet on a DEX, you are in complete control of your crypto — you never have to send your assets to the exchange. But you’re also responsible for the wallet’s security. For example, when you set up your wallet, you’ll generate a seed phrase — usually 12 random words. If you lose your seed phrase, you will not be able to access your funds.
Traditional crypto wisdom says it’s always better to use a non-custodial wallet and keep control of your keys. But this may no longer be the case for beginner investors who just want to buy and hold a small amount of cryptocurrency.
In the early days, exchange hacks were much more common and outweighed the risks of, say, losing the password to your wallet or losing the wallet altogether. These days, many smaller investors prefer the more user-friendly custodial wallets offered by centralized exchanges.
There are risks associated with both approaches. But if you do want to move your crypto assets into a non-custodial wallet, most centralized exchanges make it easy. Though you may have to pay withdrawal fees.
There are also various types of non-custodial wallets. The most secure is a hardware wallet which is a physical device that’s kept offline. In contrast, a hot wallet is usually used on the web or on a mobile device. It is less secure but can be more practical to use with a DEX.
Both types of exchanges have their place
Just as you might not put all your money in a single bank account — you may have some in a checking account, some in a savings account, and some in a stock broker account — there’s no one-size-fits-all cryptocurrency account or wallet.
I have accounts with both centralized and decentralized exchanges, and I have cryptocurrency in both custodial wallets and non-custodial wallets. I keep cryptocurrency in them for different purposes. As you explore more of the cryptocurrency world, you may decide to follow suit. But there’s no right or wrong answer, it all depends on what type of investor you are.