Centralized Exchange (CEX) vs Decentralized Exchange (DEX). Which is the best crypto exchange?
When it comes to buying or selling crypto, the first place you’d likely turn to is an exchange. Now, there are three main types of exchanges to consider: Centralized Exchanges (CEXs) and Decentralized Exchanges (DEXs).
Both are also web3 entities that are monitored on Centic and provide the information of trading volume to Token Health — the scoring system for cryptocurrency.
Each of these has its own advantages and disadvantages, depending on your level of experience and your need. So, in this article, we’ll explore the differences between these exchange types and help you make an informed choice. Let’s dive in!
What is crypto exchange?
Cryptocurrency exchanges are platforms (either online and physical form), where you can buy, sell and do spot or futures trading on cryptocurrencies (or fiat currency). They act as a middlemen, making it simple to exchange different digital currencies for traditional money (like USD, EUR) or other cryptocurrencies.
These exchanges offer various trading pairs. For example, the most popular pair is BTC/USD, but you’ll find other options like BTC/EUR, ETH/USD, and many more. In decentralized exchanges, all trading pairs involve two cryptocurrencies, such as ETH/USDC.
Centralized Exchange (CEX)
What is Centralized Exchange (CEX)?
A Centralized Exchange (CEX) is a type of cryptocurrency exchange that operates through a centralized platform, meaning that all transactions are settled off-chain and its operations are controlled and managed on the system of an organization.
Moreover, centralized exchanges usually have KYC (Know Your Customer) and AML (Anti-Money Laundering) requirements to ensure the legal standards.
How does Centralized Exchange (CEX) work?
CEXs work much like traditional stock markets, using an order book to match buyers and sellers. It’s like an open market with a central authority overseeing transactions. On a CEX, all users can see the full order book, enabling “price discovery” to find the “last done price” and depth of the book. The exchange takes a small fee for facilitating trades.
They operate as trustworthy brokers in deals and frequently serve as custodians, keeping and safeguarding your cash.
Decentralized Exchange (DEX)
What is Decentralized Exchange (CEX)?
A Decentralized Exchange (DEX) is a type of cryptocurrency exchange that operates without the need for a central authority or intermediary. Unlike centralized exchanges (CEXs), where an organization manages the platform and user funds, DEXs are built on blockchain technology and utilize smart contracts to facilitate peer-to-peer (P2P) trading directly between users. Therefore, decentralized exchanges have no KYC or AML regulation.
How does Decentralized Exchange (CEX) work?
As decentralized exchanges are built on top of blockchain networks that support smart contracts and where users keep custody of their funds. In essence, traders interact with smart contracts on the blockchain to use DEXs.
Decentralized exchanges typically work by matching orders from buyers and sellers using smart contracts. These contracts are stored on a blockchain and can be executed automatically when certain conditions are met.
Which is the best crypto exchange?
Depending on your demand and experience, each has distinctive characteristics. Let’s weigh all the factors of Centralized and Decentralized Exchange to find the answer.
Core Features
CEXs are faster and user-friendly with various deposit options, providing near-instant trade settlement. DEXs, although slower and requiring more experience, allow users to retain asset custody, supporting only cryptocurrency pairs and on-chain processing.
Control
On a CEX, the exchange holds your assets, so you rely on their commitment. Without control over private keys, there’s a risk of asset confiscation.
Meanwhile, with DEXs, users keep control with their private keys and cryptocurrency in their wallet. DEX never gains custody of assets, meaning that they stay under the user’s control.
Transaction Fees
Despite claims that DEXes are cheaper than CEXes, it’s not entirely accurate. While DEXes may have lower maker and taker fees, settling trades on-chain can lead to higher overall costs due to gas fees and potential slippage. These additional costs result from approving transactions, token swapping, and potential token wrapping on a DEX. Slippage may also occur if the DEX can’t fill your order as requested in terms of price and size.
Variety
CEXes’ trading pairs vary by the exchange. Binance and KuCoin list numerous altcoins, while others have fewer options. CEXes support crypto-to-fiat trading.
Meanwhile, DEXes offer a wide range of crypto-to-crypto pairs. Anyone can create a new market, making them permissionless. However, DEXes don’t support crypto-to-fiat trading, only crypto-to-stablecoin pairs.
Risks
CEXes have risks as users give up custody, making them vulnerable to hacks. Large exchanges faced attacks, and accounts could be frozen despite KYC compliance.
On the other hand, DEX risks involve liquidity providers facing impermanent loss due to volatility and potential rug pulls since tokens are listed without auditing, leading to sudden losses if liquidity is withdrawn.
Regulation
CEXes comply with KYC and AML standards to prevent money laundering and financing terrorism. Completely KYC-less CEXes are rare now.
DEXes are unregulated as they process trades on public blockchains through smart contracts, evading direct financial intermediary roles. Authorities haven’t succeeded in regulating them yet, but this might change in the future.
Trading Volume
the trading volume on decentralized spot markets is only a fraction of that on centralized exchanges
Liquidity
CEXs offer high liquidity, enabling large trades up to hundreds of millions of dollars. On the other hand, DEXs have lower liquidity due to on-chain nature, causing slippage with worse prices for large orders. Trading significant sums on DEXes may result in higher costs for traders.
Prominent crypto exchanges
Among the vast variety of cryptocurrency exchanges operating in the market today, there are several exchanges standing out with the biggest total assets and trading volume.
Top 3 Centralized Exchanges
Binance
Binance is one of the world’s largest and most popular cryptocurrency exchanges, supporting a wide range of cryptocurrencies, including Bitcoin, Ethereum, and numerous altcoins as well as a vast selection of trading pairs. It gained popularity due to its competitive fees, quick transaction processing, and extensive support for various cryptocurrencies.
In addition to its core exchange services, Binance also offers a suite of other tools and services, such as a fiat-to-crypto platform.
Coinbase
Coinbase Exchange, now known as Coinbase Pro, is a user-friendly and reputable cryptocurrency exchange based in the US. It caters to both beginners and experienced traders, offering a limited but carefully selected range of cryptocurrencies.
The exchange is known for its strong security measures and regulatory compliance, providing features like 2FA and cold storage for fund protection.
Kraken
Kraken is a well-established and reputable centralized cryptocurrency exchange. Founded in 2011, it is one of the oldest exchanges in the crypto industry. It offers a variety of cryptocurrencies for trading, including fiat currency pairs. The platform prioritizes security, using offline cold wallets for fund protection.
Kraken provides options for spot, margin, and futures trading, along with advanced charting tools. It is known for its regulatory compliance and has gained popularity among traders and investors for its trustworthy and diverse offerings.
Top 3 Decentralized Exchanges
Uniswap V3
Uniswap V3 is the third version of the Uniswap decentralized exchange protocol built on the Ethereum blockchain. Uniswap is a popular and pioneering decentralized exchange (DEX) that allows users to trade cryptocurrencies directly from their wallets without the need for intermediaries or a centralized authority.
PancakeSwap
PancakeSwap is a decentralized exchange (DEX) built on the Binance Smart Chain (BSC). It offers users a user-friendly and cost-effective way to trade cryptocurrencies and participate in various decentralized finance (DeFi) opportunities.
The platform utilizes liquidity pools and has its native token, CAKE, which allows users to participate in governance and earn rewards through staking and yield farming.
Curve Finance
Curve Finance is a decentralized exchange protocol on Ethereum designed for stablecoins and low-volatility assets. It focuses on providing low slippage and minimal fees for trading stablecoins by using automated market maker (AMM) pools.
The platform has gained popularity for its capital efficiency and high returns for liquidity providers. Curve Finance is a significant player in the decentralized finance (DeFi) space, offering efficient trading solutions for stablecoins.
Conclusion
CEXs offer faster transactions and higher liquidity, but users give up custody of their assets and face security risks. DEXs provide more control over funds and enhanced security but have lower liquidity and may involve impermanent loss risks. Users should consider factors like fees, regulation, and trading volume to select the best exchange that suits their needs.
Centralized and decentralized exchanges are factors that contribute to the scoring system for cryptocurrencies of Centic. Being crucial components of the crypto market, they provide valuable insights into market trends based on users’ trading behavior. Centic tracks and analyzes these exchanges, allowing for comprehensive monitoring of the market dynamics.
Centic is a data analytic platform that provides the scores of all entities on Web3 Space and integrates on-chain data in blockchain space and off-chain data in reality.
By providing a comprehensive evaluation system, we assist users in confidently making the right investment decision both in the traditional and digital world.
