Centralized Exchange (CEX) vs. Decentralized Exchange (DEX)
What differentiates them?
For a newbie or considering buying cryptocurrency, then cryptocurrency exchanges such as binance, kucoin, Kraken, uniswap, etc., are the exact place to make your purchase/ transaction.
If you are also a trader or someone into cryptocurrency and blockchain, chances are that you must have heard the word CEX (centralized exchange) and DEX (decentralized exchange). Let’s dive into both and clearly explain what they are and the critical difference between them. Firstly let’s begin with an exchange
Cryptocurrency exchange
cryptocurrency exchanges are platforms where customers trade (buy or sell) cryptocurrencies or digital currencies. These digital currencies/cryptocurrencies can be converted to Fiat in some exchanges.
Some of these exchanges accept credit cards and wire transfers as other forms of payment, while others accept trading of one digital currency to another as the only mode of payment.
Types of cryptocurrency exchange:
- Centralized Exchange (CEX)
- Decentralized Exchange (DEX)
Centralized Exchange (CEX)
Centralized exchanges are digital marketplaces where customers or users trade (buy/sell) cryptocurrencies for fiat currencies such as UK Pounds or Nigeria Naira, or between digital currencies, e.g., Eth and sol.
It is an intermediary organization that digitally facilitates trades between buyers and sellers in a digital marketplace, using Fiat for digital currency or digital currency for digital currency. These exchanges profit from the transaction fees of traders who trade or use their platform.
Some examples of centralized exchange include:
binance
kucoin
huobi global
coinbase
bitstamp
ftx
Kraken. etc
For a new user or customer to trade or use a centralized exchange, he must create an account, verify his phone number/ email, and perform a KYC (know your customer) task. This task includes verifying your identity: name, country, state, and local government of residence, uploading any government-issued identity document and a picture.
Advantages of centralized exchanges
- User friendly especially for beginners
Centralized exchanges are well developed, structured, and very easy to use interface, simple platform with lots of guides to onboard new users
- Centralized exchanges have an additional layer of security and trustworthiness
- High liquidity.
- Massive trading volume
Disadvantages of a centralized exchange
- Risk of Loss of fund due to the hacking of custodial wallet :
A custodial wallet is susceptible to hacking and cyber security threats, leading to the loss of user funds.
- Can be shut down by the controlling or intermediary organization
- Has high transaction fee when compared to decentralized cryptocurrency exchanges due to deposit and withdrawal fees
- Not in control of your funds due to no access to private wallet keys
Decentralized Exchange (DEX)
Decentralized exchanges are platforms that facilitate peer-to-peer transactions of cryptocurrencies between traders. These type of exchanges does not require keeping your funds/cryptocurrencies in a custodial wallet of the intermediary organization and also does not allow transactions between fiats and digital cryptocurrencies.
Some examples of decentralized exchange include:
- 1inch exchange
- pancakeswap
- Sushiswap
- Curve finance
- Burgerswap etc
Some users prefer decentralized exchanges due to some of the problems associated with centralized exchanges, which include
- Loss of fund due to the hacking of custodial wallet (wallet of the intermediary organization)
- Centralized exchanges charge higher transaction fees than peer-to-peer transactions due to the service rendered using their platforms.
Advantages of decentralized exchange
- Anonymous usage
Users are not required to perform KYC (know your customer) tasks in decentralized exchange; as such, it provides a high level of privacy and anonymity to the users
- minimizes loss of funds due to hacking
Mt. Gox was one major cryptocurrency exchange hacked in 2011 and 2014, and they lost bitcoin worth $8.75m and $615m, respectively, to hackers. There are other examples of centralized exchanges that lose funds to hackers, leading to a massive loss for the users of such exchanges. Using decentralized exchange can minimize these risks, as users are not required to transfer funds to any intermediary custodial wallet. Instead, they are sole custodial of their digital assets in their digital wallets.
- Cheaper transaction fee
The decentralized exchange facilitates trade between peer-to-peer. There is no need for any intermediary organization which collects additional service charges for deposits and withdrawals. Hence, transactional fees are cheaper when compared to a centralized exchange.
Disadvantages of decentralized exchange
- It does not accept fiat payment
- Difficult to use
Centralize exchange will help you recover your account if you lose your password or login details. What you have to do is click forget password and follow the prompt that follows. But this is not the case in a decentralized cryptocurrency exchange. Here you have to note down your login details, including your keys and passwords, keeping it safe (away from any unauthorized user) because losing access to it is the same as losing access to the wallet and the funds therein. Also, a centralized exchange is more straightforward and user-friendly, especially for beginners.
- Low liquidity supply is another constraint with a decentralized exchange.
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