Crypto enthusiasts have two options for cryptocurrency exchanges; decentralized and centralized trading platforms. But how do these platforms differ, and what makes them unique or preferable in the crypto space?
This article is a DEX vs. CEX comparison guide. A decentralized exchange DEX operates without the control of a central authority. Users buy or sell assets without middlemen. But on the centralized counterparts, users depend on the exchange. The centralized organization has complete control of all the transactions on the platform.
There are more differences between centralized and decentralized exchanges. Keep reading to learn more before you begin trading.
Centralized Exchanges (CEX) What Is It?
Centralized crypto exchanges support the buying, selling, storing and trading of virtual assets in a controlled manner. The exchange takes charge of the transactions, subjecting users to more regulatory supervision than their decentralized counterparts.
Moreover, centralized structures rely on order books to match buyers and sellers. These platforms have the same operational structure as online brokerage accounts. Also, CEXs uphold more regulatory practices, such as the Counter-Terrorist Financing (CTT) check, Know Your Customer KYC policy, and Anti-Money laundering (AML) checks.
These practices enable them to prevent financial fraud and prosecute bad actors. Due to how centralized exchanges operate, new crypto users prefer them. The structures are already established, ensuring smoother virtual asset interactions.
But in terms of transaction volume, centralized exchanges don’t process as much as DEx. The network nodes must get real-time updates before executing trades. Also, CEX users leave their private keys on the exchange, increasing the risks of hacks
Some popular centralized crypto exchanges now include Crypto.com, Bitfinex, Huobi, Coinbase, Binance, BlockFi, Kucoin, and Gemini.
How does a typical centralized exchange work?
A single point of control facilitates every transaction on a centralized crypto exchange. The exchange serves as a middleman in the transactions between the buyers and sellers. It controls and monitors the flow of crypto assets and holds them on its users' behalf. In turn, the users pay transaction fees and commissions.
Users registering on a centralized exchange will pass through an identity verification process. Some of these verifications will involve providing their names, permanent addresses, identity verification documents, etc. After meeting the KYC, AML and CTT requirements, the user will qualify to access the platform, deposit money, and start crypto trading.
Transactions on these exchanges rely on order books. The book tracks all transactions to facilitate a secure and efficient exchange. For instance, if a buyer notifies the brokers of an intention to purchase an asset, the broker will find the seller with the matching requirement to the buyer. Then, the asset exchange will take place, completing the transaction.
Users of a centralized cryptocurrency exchange don't swap assets directly. The assets are held by the exchange and are released as IOUs to the dealers. These IOs are unofficial documents confirming the debt of one user to another. They act like smart contracts on decentralized exchanges.
Decentralized Exchange (DEX): What Is It
Decentralized crypto exchanges are peer-to-peer crypto trading platforms where users retain control over their transactions. No single authority monitors activities such as custody or transfer of assets. Crypto users can transfer their assets on an open market without waiting for an intermediary.
Also, users have access to more coin listings on decentralized platforms. They can send or receive any asset directly into their digital wallet.
Since decentralized exchanges don’t have in-built wallets, users have custody of their private keys and can store their crypto assets in cold wallets. Also, as CEX utilizes IOUs to facilitate transactions, DEX utilizes smart contracts. Once the parties meet the requirements of the smart contracts, it executes automatically.
Some of the notable DEXs include PancakeSwap, Uniswap, Kyber, dYdX, etc. Most decentralized exchanges are built on Ethereum and use its native token, ETH, to transact.
Most importantly, users of DEXs enjoy anonymity. They’re not subjected to KYC, AML and CTT processes. All they need is their public address, private key, and secret identity to authorize transactions.
How does a DEX work?
There are two designs for a decentralized exchange regarding transactions between buyers and sellers of digital currencies. The crypto exchange can rely on order books or automated market makers (AMMs). There are also aggregators that parse through different decentralized exchanges on-chain to find the best price or a lower gas fee for transactions.
Trade execution on a DEX relies on smart contracts and on-chain transactions. Users control their funds on any wallet they want during trading. These exchanges don’t hold crypto assets, but require users to pay trading and network fees on the platform.
The network fees on DEXs are the gas cost of the on-chain transaction. But trading fees go to the underlying protocol, its token holders or liquidity providers. Since there’s no central authority on DEXs, the community members serve as the stakeholders and can make decisions based on their governance tokens.
These stakeholders make up a DEX’s DAO (decentralized autonomous organization) that votes on diverse protocol decisions.
DEX order book
An order book DEX relies on its internal system to match buyers and sellers. Users who wish to sell a crypto asset will send the details to a smart contract. This detail includes the cost of the item to enable the internal systems to match the requirement to another user.
Once the platform locates a suitable buyer through the order book, it'll accept its conditions and complete the transaction. The order book tracks all pending transactions on the platform and completes them.
Currently, most hybrid order books match transactions off-chain, while settlements occur on-chain. Some of the order book's decentralized exchanges include Serum, Ox, Loopring DEX, etc.
Pros And Cons Of Centralized Exchanges
Centralized exchange operations are similar to the traditional stock exchanges or some platforms for fiat currency exchange. That’s why many new entrants to the blockchain space utilize them more. So, let’s explore the pros and cons of using a centralized exchange CEX for digital assets transactions.
Pros of a CEX
- Seamless trading experience
Centralized exchanges offer friendly user interfaces that allow beginners to embrace crypto easily. These exchanges operate as online brokers acting on behalf of new investors. The users don’t have to navigate the complexities of a crypto wallet or complete peer-to-peer transactions. They rely on the system to execute their request.
- Highly liquid
Many popular CEXs boast of high liquidity. There's no cash flow shortage. Their trading volumes hit the roofs, ensuring that asset exchange can continue without interruptions or delays. For instance, many people prefer Binance for transactions due to its swiftness in completing asset exchanges regardless of volume.
- Support for fiat conversions
Users of centralized exchanges can easily convert their fiat to crypto within minutes. These platforms allow these conversions on and off-ramps. For instance, you can buy crypto with your USD without needing to convert to another crypto.
Centralized exchange platforms support margin trading. This is a method of investing with borrowed money from the platform. By this, investors can gain more returns with less capital.
For instance, Margex is a crypto derivative platform where you can earn more with crypto trading. The exchange offers 100x leverage, meaning you can open a $2000 trade with $200. It also allows users to trade staked assets and earn higher APY.
With such leverage, you can build your capital from what you earn.
- More transaction options
Centralized exchanges offer more features to crypto investors and traders. Apart from exchanging cryptocurrencies, there are many things to do on centralized trading platforms. Some of them include margin lending, margin trading, exchange staking, crypto derivatives trading, etc.
Cons of CEX
- High transaction fees.
The fees on many CEXs are very high. Since the users rely more on the system than themselves, they pay for the services rendered. These fees are usually prominent when executing many transactions. For instance, on Binance, users pay many fees. But Binance fees are sometimes lower compared to other CEXs.
- Susceptible to attacks
Centralized crypto exchanges hold a large volume of assets for their users in online wallets. These on-chain wallets sometimes hold billions of dollars in BTC, thereby attracting bad actors. But once the hackers compromise the central server, they can access and steal users’ funds without hindrance.
- Custodial wallets
CEXs hold the user’s assets deposited on the platform and their private keys. That's why the community usually uses this phrase, not your keys, not your coins. This phrase implies that CEX users don't own their crypto assets because they don’t hold their private keys. As a result, they can lose all if theft or fraud occurs on the exchange.
- Lack of anonymity
User anonymity is lacking in centralized exchanges. Before accessing the platform, users must first meet the Know-Your-Customer policy, exposing their sensitive information. For instance, you must provide a clear photo of your face and a government-issued ID card before buying, selling or withdrawing funds from a CEX trading venue.
Pros And Cons Of Decentralized Exchanges (DEX)
A decentralized server network is usually more open and allows users to control and participate in keeping it secure. But while there are advantages to these types of structures, there are still some disadvantages. Let's explore them below.
Pros of a DEX:
- Better security practices
A decentralized exchange tends to be more secure than the other exchange counterparts. These platforms are noncustodial, meaning that assets are never stored online. Users' assets are safe from hackers since they hold their private keys.
Also, users are not required to disclose their private data.
- Support for NFT and DeFi
DEXs facilitate the operations of many DeFi protocols and decentralized applications. They enable crypto enthusiasts to maximize opportunities in NFTs, saving and providing liquidity to maximize earnings.
- Complete anonymity
Many crypto investors, traders, and those who contribute to liquidity pools prefer to remain anonymous. They aim to protect themselves against unnecessary exploits from bad actors. DEXs ensures this by not requiring KYCs as centralized exchanges do.
All a user need is to connect a wallet to the exchange and sign the transaction they want, no questions asked.
- Protects users in trading
Decentralized exchanges support P2P crypto exchange. This structure removes the interference of third parties capable of manipulating asset prices. As such, users can be safe from wash trading where an investor can buy and sell one asset many times to boost trading volume, hype its worth, or provide commission fees for brokers.
DEX vs. CEX; A Comparison Table
A comparison of DEX vs. CEX shows that the platforms differ in operations, security practices, processes, and others. Find more details below.
Cons of a DEX
- Absence of fiat payments
Decentralized exchanges are not ideal for those who want to exchange fiat currency for crypto. This feature is one of the advantages that CEX holds over DEX. It makes it more difficult for users that do not own any crypto to use a platform.
- A rather complex setup
Users must save the private keys to their crypto wallets, since they are in complete control. Failure to recall these codes will result in a total loss of all assets. Users must get an in-depth understanding of how the platform works to prevent costly errors.
Moreover, DEX lacks support services that customers can reach out to when issues arise.
- Low Liquidity
DEXs lack liquidity most often. This issue sometimes makes it tough to find buyers and sellers when the total trade volume is low. It could discourage traders who wouldn’t want to get stuck in a low liquidity cycle.
But DEX networks like gnosis protocol exchange are developing creative ways to solve this problem.
- The code risk
DEX platforms operate on smart contracts with a certain degree of risk. If a smart contract code is compromised, users can lose all their assets. The solution is to use top DEX platforms with more security protocols.
FAQ-Commonly Asked Questions On DEX Vs. CEX Comparison.
We answer most of the common questions on the DEX vs. CEX comparison below.
Why is transaction faster on CEX than on DEX?
CEX platforms offer users a well-developed user interface that is easy to navigate. These exchanges are faster due to their focus on entrepreneurship, security, and reliability. The CEX also supports all kinds of tokens and blockchains.
What does DEX mean in crypto?
A decentralized exchange (DEX) is a peer-to-peer marketplace facilitating direct transactions between crypto traders. The exchange cut out third-party interference from intermediaries like banks. DEX does not support fiat currency to crypto exchange. Instead, it favors crypto to crypto exchanges.
DEX are grouped into three classes: Automated market markers, order books DEX, and DEX Aggregators.
Is CEX good to use?
CEX is a good exchange for crypto users, although it depends on the user's needs. It supports many cryptocurrencies and offers crypto loans. It is secure to a large extent and uses know your customer (KYC) verification.
Centralized crypto exchanges provide a form of regulatory supervision of their users.
Does DEX support crypto selling?It is possible to sell cryptocurrencies on a decentralized exchange. The trading is done without a middleman. DEXs relies solely on smart contracts and is a do-it-yourself market. You can sell cryptocurrency directly on many popular DEX platforms using a smart contract.