With a crypto exchange, you can trade crypto assets with other crypto assets, cash, or other digital assets. So you want to trade and hear about centralized exchanges (CEXs) and decentralized exchanges (DEXs), the two primary forms of crypto exchanges. How do they differ? Which one is better for you?
What Is a CEX?
A CEX is a cryptocurrency exchange with a single authority and its own order book mechanism. Because CEXs hold user funds, traders must trust them to trade. They also provide a wide range of cryptocurrency-fiat currency transaction options and charge fixed fees.
CEXs are regulated and have strict know-your-customer regulations in place, all in a bid to safeguard customer assets. As a result, they aggressively pursue fraudsters under current law to avoid financial fraud.
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A CEX allows traders to purchase and sell assets because its order book monitors and records all pending transactions. The CEX’s internal network safeguards this information.
MEXC Global, Binanc, Coinbase, and Kraken are examples of CEXs.
Pros of Centralized Exchanges
- Simple user interface and easy access to cryptocurrency trading
- They offer high liquidity because of their large trading volume and cash flow
- Transactions are processed swiftly and in real-time
- Wide range of trading pairs and currencies for transactions, withdrawals, and deposits
Cons of Centralized Exchanges
- Customers will lose their assets if they go bankrupt or yield to vulnerabilities.
- Legal teams, CEX authorities, and other operators have control over trades, contrary to the foundational idea of cryptocurrencies.
What Is a DEX?
A decentralized exchange allows peers to trade digital assets without middlemen or centralized authority. This type of crypto exchange aligns with the peer-to-peer electronic cash system introduced by Satoshi Nakamoto in his whitepaper.
DEXs facilitate the exchange of all online currencies. To utilize a DEX, you typically only need a public address.
Although DEXs can be established on any cryptocurrency network, most DEXs are based on Ethereum and use Ether (ETH) as their primary currency. Decentralized exchanges have evolved. Initially, order books were used, similar to what is obtainable in the traditional financial market. However, the most recent DEXs employ an automated market maker (AMM). But order book DEXs and DEX aggregators are still available.
Examples of DEXs include Uniswap and Yeti Swap.
Pros of Decentralized Exchanges
- As no intermediaries or centralized authorities are present here, customers maintain control over their assets and trades.
- User anonymity is assured with a DEX, as you are not required to submit your personal information to use one.
- Lower chances of system breaches and inaccessibility due to server collapse because a decentralized server network is employed.
Cons of Decentralized Exchanges
- Transactions are typically resolved slower than on CEXs
- Generally lower liquidity than CEXs
- The user interface of a DEX will likely be too complex for new traders
- DEXs do not offer as many advanced trading features as CEXs
Differences Between a CEX and a DEX
Although centralized and decentralized exchanges set out to enable you to trade crypto assets, they are fundamentally distinct. Here are a few differentiating factors.
Custody
If you use a DEX, you likely hold your crypto assets. Centralized exchanges employ the use of custodial wallets, meaning that they keep your assets on your behalf. As a result, a CEX manages your security, but you’re in charge of securing your assets with a DEX.
Trade Method
Most centralized exchanges use order books, while most decentralized exchanges use automated market makers (AMMs). And with many CEXs, the process of trading and matching orders is centrally owned and protected. On the contrary, many DEXs make their processes open source, allowing anyone in their community to audit the code and detect vulnerabilities.
Checks and Privacy
There is no need for identity verifications in a DEX, unlike in a CEX where know-your-customer (KYC) and anti-money laundering (AML) checks are typically required. Because DEXs do not have a centralized authority, it is difficult for the government to force them into compliance.
Liquidity
In a centralized exchange, the platform owner pays for the liquidity. As a result, users can usually always trade their assets anytime they want. This is not so with DEXs. Trade on decentralized exchanges is peer-to-peer (P2P), so there might not be enough users willing to trade an asset, especially at your given price.
Intermediary
In a CEX, the platform (a single organization) authorizes and regulates transactions. Meanwhile, smart contract technology is employed in a DEX to regulate and authorize transactions.
Fees
Decentralized exchanges are generally less expensive because no third parties or intermediaries are involved.
CEXs and DEXs Are Vital in the Crypto Industry
Like other comparisons, both CEXs and DEXs have pros and cons. Choosing one ultimately depends on your money management style. In addition, several CEXs have recognized the authority distributed via decentralized trading and are improving their versions or incorporating DEX capabilities into their platforms. Thus, CEX and DEX will likely combine to offer a bit of both worlds.
With CEXs, new crypto traders can focus on trading and leave exchange management to the platform, placing their safety and assets at the feet of the CEX. However, DEXs offer more freedom and perhaps better payoffs but may demand more knowledge. Which is better for you?
I actually prefer Crypton Exchange. It is completely decentralized — no government, no bank, no corporation can influence its rate or issue.