According to CoinMarketCap, a curated database of many different crypto-related analytics, there are 500 crypto exchanges. 251 of these exchanges are considered Centralized Exchanges (CEX), while the other 249 are deemed Decentralized Exchanges (DEX). Centralized would imply a company is in charge of that particular exchange, just like all regular businesses and every other stock exchange in the world. They are expected to comply with national and international laws regarding securities, trade, types of transactions, eligible users, etc.
A DEX, on the other hand, can have a company supporting them, or they can also have an anonymous group of individuals, or better yet, just some open-source code that is put to use. A Decentralized Exchange does one thing differently that makes a comparison possible: the ability to buy, sell, or trade with other people worldwide without an intermediary. (An intermediary acts as the member of a centralized exchange that would place an order on your behalf, as you are technically not allowed to go to the NYSE and buy a stock yourself).
You may be asking yourself whether this is a big deal or not, and that is where this article comes into play. Of course, there are pros and cons to everything, and a CEX vs a DEX is absolutely no exception to that rule. So let’s cover some of the most significant differences between the two major types of exchanges so that you can understand the benefits and drawbacks of each.
PRIVACY is the cornerstone of the entire crypto market. There are specific coins that deal purely with the anonymity of the transaction itself while verifying that the transaction data is legitimate on-chain. We can consider a CEX less private than a DEX because a CEX will require your name, address, and other personal information to set up your account before you ever trade. A DEX will likely only need you to connect your digital wallet to their service.
SECURITY is another primary concern as we are dealing with assets worth money. CeFi (Centralized Finance) and DeFi (Decentralized Finance) are the terms used within the crypto market to describe types of exchanges or protocols. Security on a CEX can be very strong, and they can use the best technology in the world to protect your money and ensure hackers don’t steal your personal information.
A DEX, however, puts this burden on the user. The user is in charge of connecting to the right site and using their assets by approving transactions before spending tokens. It is important to note that some CEXs have been hacked in the past, and not all CEXs have the same level of security for their users.
CONVENIENCE is what most people would consider QoL, or Quality of Life. These are options or features that help make the whole user experience better. Once you have deposited on a CEX, your capital or assets can easily be moved around the exchange. Whether those moves are from a spot, margin, or futures account, one click is generally all it takes to move those funds from point A to point B.
On a DEX, a user needs to first connect their wallet for the exchange to see the available assets that the user will inevitably use to spend. Spending through a DEX can be cumbersome because you have to approve the use of each asset and the transaction itself when you’re ready to place an order. This can be tricky for new users that have yet to become familiar with the process.
TOOLS and the availability and access of these tools are significant differences between exchanges. In general, a CEX will have a lot of tools for both beginners and experts that are easy to use. Tools can also carry over to the types of orders a user can implement on the exchange itself. Orders like Stop-Limit, Limit, and OCO are not often used on DEXs but are common on CEXs. A DEX can be thought of as a standalone single-order machine. You go to the DEX when you want to execute the order and make the trade. A CEX gives you much more freedom because you can set up whole strategies and even use trading bots to make trades while you sleep.
AVAILABLE ASSETS differ from CEXs to DEXs. A traditional CEX may have thousands of pairs that all call different blockchains their “home” or “native chain.” A DEX can offer multichain options, but most common DEXs will offer a suite of tokens that have a presence on a particular chain. For example, $USDT is a popular stablecoin that can be found on many chains. However, if you go to a DEX, you must first decide which chain you want to trade on and then check to see if that asset is available on that chain. You may find yourself in a situation where you need to bridge from one chain to another to buy the asset that you want to hold. A CEX makes this process seamless as all the tokens are held on the exchange, allowing you to trade back and forth regardless of the native chain or where that token originated.
COST comes down to a few factors. On the CEX, you will have trading fees for every trade. A CEX will divide trading fees into two categories: the Maker Fee and the Taker Fee. A Maker is simply someone who has placed an order, and the order still needs to be filled. This helps to “make” the market and provides liquidity for the other side of the trade. A Taker, on the other hand, is someone who executes a Market Order. A Market Order is an order that executes regardless of the asset’s price and will remove liquidity from the order book until the order is filled.
It does not stop there: every exchange has to deal with liquidity, and with liquidity, we encounter another cost issue — slippage. Slippage is the difference you pay for the asset from the beginning price of the first trade until a Market Order has been filled completely. For example, if a user wants to buy $1 million of an asset and is dead set on using a Market Order unless the order book has $1 million currently available on the sell side, the user will pay slippage. The exchange will work through the selling side order book until the $1 million order has been satisfied. The asset they were buying may have started with a selling price of $20, but by the time their million was depleted, they were paying $40 for each token. That slippage would be 100%.
This is important to know as almost all DEXs use their version of Market Orders to execute trades on the user’s behalf. Unfortunately, it is not a perfect 1:1 as DEXs rely on AMMs (Automated Market Makers), but we won’t get into that discussion for now. Treat a DEX as a Market Order, and you will be 90% of the way to understanding how it works. A DEX will also have slippage and a slippage tolerance. There are a few DEXs out now, and there are sure to be more in the future that offer their own version of Limit Orders. A Limit Order has no slippage.
Another cost of a DEX is the “gas,” which the blockchain uses to record the transaction’s data. The most egregious example was on the Ethereum blockchain around the summer of 2021. A user could buy a $20 NFT on the Ethereum blockchain and pay $300 in gas alone. This has since come down, but you can see from the example that gas is something that deserves your attention. With a CEX, there is no inherent gas fee, as all trades are handled on the exchange itself.
CONTROL, along with privacy, can be considered one of the essential features of a DEX. Control comes down to owning the private keys to a user’s wallet.
On a CEX, a user must deposit money. Once that money is deposited, it is now in the control of the exchange and no longer the user. Yes, the user has access unless, of course, the exchange decides the user does not. There is a fine line between hot wallets, exchange wallets, and user wallets. The convenience is that you can move your assets all over the exchange for no fees, which is very easy. The downside is that there may be limits to how much you can withdraw and when. Another downside is an exchange hack, where you could lose all your money on the exchange. Unfortunately, this has happened many times.
The advantage of a DEX is that you are in control: you connect to the exchange, and when you are done, you disconnect and revoke all access. This means that you and you alone are responsible for the tokens in your wallet, and you are in complete control.
Ultimately, each type of exchange has its own purpose and its place amongst users all over the world. The highlights of a CEX are security, liquidity, and cost, while the highlights of a DEX are privacy and control. Oftentimes, a well-versed user in the space will be familiar with both CEXs and DEXs as they bring other opportunities to the table.
