If you are considering trading cryptocurrencies you will have to use an exchange. Ultimately, they are the gateway to the wonderful crypto ecosystem. But what you may not know is the difference between a centralized and decentralized one.
Don’t worry, I am here to help. In this article, I will be explaining this and much more. So without further ado, let’s dive right in.
What are CEX and DEX exchanges?
In a nutshell, exchanges facilitate trading. They allow users to buy and sell different cryptocurrencies. So what is the difference between a centralized (CEX) and decentralized exchange (DEX)? Well as the name suggests, a centralized exchange is controlled by a central authority. When users deposit their cryptocurrencies they are placed under the control of the operating company. On the other hand, decentralized exchanges are not controlled by an intermediary. Instead, trading is peer-to-peer using smart contracts.
| Cex | dex |
|---|---|
| A central authority that regulates the exchange | Decentralized – users have control over their assets |
| Closed system | Open code |
| Identity disclosed | No identity disclosure |
| Third-party fees | No third-party fees |
| The exchange is responsible for the security | The user is responsible for the security |
| Greater liquidity | Less liquidity |
Centralized exchange Pros & Cons
To start with, CEXs are extremely user-friendly. The UI is great and it’s less complex when compared to DEXs. Users don’t have to deal with private keys or bear all the responsibility for securing their own funds. Also if you forget your information you can simply reset your account to regain access. Not to mention, there is greater liquidity due to institutional backing. This results in less slippage.
That being said, as there is a third party there are additional fees for trading. These can add up over time. Also, as the exchange is holding your funds in a centralized wallet this can make it prone to hacks. Not only that, but know your own custom (KYC) is usually necessary, and this requires users to reveal their identity.
Decentralized exchange Pros & Cons
There are several advantages to decentralized exchanges many of which are core to the crypto ethos. Firstly, they are permissionless. There is no KYC or long application process. This alternative provides anonymity and is open to all. The permissionless nature of DEXs can also lead to cheaper trading as there is no intermediary taking a trading fee.
Secondly, trading is completely transparent. The smart contract platforms are open source, therefore you know if they are working as intended or if someone is performing illicit activities.
Moreover, as you secure your own funds there is some peace of mind. If you are using a hardware wallet then it is virtually impossible for a hacker to steal your funds. The hardware wallet that I recommend is the Ledger Nano X.
On the flip side, there are also a few cons to DEXs. Firstly, some people may find self-custody difficult. Beginners often find the process of setting up a wallet and private keys overwhelming. Not to mention, if they lose access they essentially lose all their funds.
Another con is liquidity. As these protocols are not reliant on institutional backing and traditional order books there is considerably less liquidity. This results in more slippage.
Conclusion
Overall, both CEXs and DEXs have their pros and cons. If you want access to more liquidity and a more user-friendly experience then the CEX is probably the choice for you.
On the other hand, if you want to remain anonymous and self custody of your funds then the DEX is probably the best option. But ultimately there is not a perfect platform for trading. But hopefully, as the space continues to develop this will change.
If you want to learn more about DEXs. Click here.
