I this article we will learn about the differences between two types of crypto exchanges i.e centralized (CEX) and decentralized (DEX).
What are the advantages and disadvantages between the two types of exchanges.
Centralized exchanges (CEX), like Binance or Coinbase, are online trading platforms where you can buy or sell your crypto assets placing orders in an orderbook. They function essentially the same way as online brokerage accounts, which is why they are so popular among investors.
Decentralized exchanges (DEX), like PancakeSwap or Uniswap, are autonomous financial protocols powered by smart contracts that enable crypto traders to convert one digital asset for another with all transactions explorable on the blockchain.
In a centralized crypto exchange, most of the control over your account remains in the hands of the third party which runs the exchange. On the other hand, with a decentralized exchange, all the control of the account remains with you. The main difference between centralized and decentralized exchanges
This is another notable reason why decentralized exchanges are becoming popular.
But fund security is not the only difference between the two types of exchanges.
Centralized Exchange (CEX): Pros & Cons
1. Trading Volumes
Centralized exchanges are typically highly liquid. Binance, for example, regularly records more than $30B in daily trading volumes. For newbies, these active platforms essentially guarantee that their assets can be exchanged seamlessly at any time. For experienced traders, CEXs provide a way to move relatively large amounts of funds in and out within minutes.
2. Fiat/Crypto and Crypto/Fiat Currency Conversions
Centralized exchanges typically support fiat to crypto on and off-ramps, meaning that they allow you to buy bitcoin with US dollars, for example.
3. More Features
Aside from the vast array of digital assets that CEXs support, they offer a lot more features other than exchanging one asset for another, such as margin trading, crypto derivates trading, exchange staking, and margin lending, among others.
4. Ease of Use
One endearing quality of most CEXs is the user interface. Considering that most newbies are unfamiliar with crypto pairs or simple terms like ‘going long or short,’ CEXs do a great job funneling users into the crypto space. Some CEX platforms, like Binance, have lite versions for users looking to make basic trades. Moreover, they function almost in the same way as online brokers, thus acting as a familiar face to traditional investors.
While centralized trading platforms offer many of the benefits investors are used to from their online brokerage accounts, they come with a handful of significant drawbacks.
1. Strict Know-Your-Customer (KYC) Policies
For users looking to maintain privacy while trading, a CEX is not the go-to exchange. Centralized exchanges are subject users to strict KYC policies. They typically require you to upload a photo of your face and a valid identity card to buy and sell crypto or make withdrawals.
2. Not your Keys, Not your Coins
While CEXs provide easy trading, high liquidity, etc., their wallets are custodial, meaning that they hold authority over your crypto. A crypto wallet should be non-custodial. Going by the famous phrase “not your keys, not your coin,” it is safe to say CEX wallets create a security risk for traders and investors.
We have borne witness to several infamous crypto exchange hacks with exchanges losing billions of dollars over the years. As exchanges hold user funds, they are prime targets for cybercriminals looking to get their hands on cryptocurrency.
Decentralized Exchange (DEX): Pros & Cons
Several features attract users to DEXs, including:
1. Privacy and Anonymity
Using a decentralized exchange typically only requires you to connect your wallet and sign a transaction. No identity verification process is required.
Decentralized exchanges are generally more secure than centralized exchanges for two reasons:
- They are non-custodial: Hackers target exchanges to access the central database and extract users’ private keys and withdraw their funds. Since DEXs do not hold your private keys, hackers cannot get into your wallet.
- No identity checks: No risk of leaking private user data.
3. DeFi and NFT Integration
DeFi and NFTs are the two frontiers of the blockchain space, and DEXs are strong propellers. DEXs allows users to access the world of smart contracts and DApps that provide financial services, including lending and savings products, as well as NFT projects.
While decentralized trading venues provide some substantial advantages over centralized exchanges, they also have drawbacks new crypto investors need to be aware of.
1. Limited Trading
DEXs are currently limited in functionality. Features like margin trades, limit orders, futures, options, etc., are typically unavailable.
Decentralized exchanges are not as fast and efficient as CEXs due to the scalability issues faced by most blockchains. Centralized exchanges are not faced with this problem because they use both on-chain and off-chain mechanisms to ensure they run smoothly.
Summary: CEX vs. DEX
Both types of crypto exchanges allow users to buy and sell crypto, with disparities in key elements such as liquidity, security, and usability.
For beginners looking to join the crypto space, CEXs provide a simple and fast way to trade. DEXs, on the other hand, are more suited for experienced traders looking for privacy and complete control over their digital funds.