How exchanges, liquidity pools, wallets, and custody differ.
| Concept | Explanation | |---|---| | Centralized exchange | A company maintains accounts, order books, custody systems, and trading infrastructure. | | Decentralized exchange | Smart contracts facilitate trading, often against liquidity pools or on-chain order books. | | Self-custody | The user controls private keys and directly authorizes transactions. | | Custodial trading | A service provider controls the private keys and records customer balances internally. | | Liquidity pool | Users deposit assets into a smart contract so others can trade against pooled liquidity. |
Decentralization changes the operational model but does not remove risk. Smart-contract vulnerabilities, bridge failures, oracle errors, token concentration, governance weaknesses, and transaction fees can materially affect outcomes.