Differences between CEX and DEX
Riding on the rise of decentralised finance (DeFi), decentralised exchanges (DEX) have grown in popularity. Emerging as an alternative to centralised exchanges (CEX), there has been talking within the cryptocurrency industry that DEXs represent the future of crypto trading.
Today, we shall explore what constitutes a CEX and DEX, their pros and cons and share our recommendations on which platform to use for trading cryptocurrencies.
CEX, as its name implies, acts as a centralised platform for crypto trading to happen. Its role within the trading ecosystem is similar to that of a bank within an economy.
Acting as the intermediary for trades to occur, a CEX assists traders in executing their trades through orders. Popular crypto CEXs include Coinbase, Binance, and Huobi.
Meanwhile, DEXs are exchanges built upon a decentralised application (dApp) hosted on a blockchain network.
The decentralised nature of it allows you to bypass traditional third-party platforms and trade directly with the buyer/seller in a deal. This brings an increased level of anonymity as personal data is not shared during the transaction and information is not stored on external servers.
While CEXs are regulated by the authorities and have to abide by anti-money laundering (AML) and know-your-customer (KYC) regulations, transactions on DEXs are not subjected to the same scrutiny. Instead, they are regulated using smart contracts hosted on the same blockchain network.
While both CEXs and DEXs serve the primary purpose of facilitating trades, how these trades are carried out results in varying advantages and disadvantages for both platforms.
CEXs are recognised for their easy-to-use interface, especially for beginners seeking to make their first crypto trade.
Furthermore, as it occupies the majority market share among cryptocurrency platforms, CEXs generally have high liquidity on their exchanges and allows for trades to be executed in seconds.
This is crucial if the trader’s strategy is centred around profiting off the volatility of cryptocurrencies.
However, due to the centralised nature of CEXs, external servers form the backbone of the exchange. These servers are susceptible to cyberattacks. The first Bitcoin exchange, Mt.Gox, was the victim of one of the most serious crypto thefts in history. In 2014, hackers captured 744,000 BTC (valued at US$42.9 billion today) and the exchange went bankrupt.
Besides, CEXs go against the primary purpose of cryptocurrencies — which is supposed to be decentralised.
In contrast, DEXs decentralised nature allows for complete anonymity during transactions as there is no exchange of personal data.
Furthermore, as DEXs are hosted on blockchain networks, it is virtually impossible for hacking to occur, thus it offers a higher level of security as compared to CEXs.
However, as the concept of DEXs is still relatively nascent, liquidity is low on these exchanges. Coupled with the need for individual transactions to be verified by miners, this results in a longer processing time for trades on DEXs.
In a nutshell, while DEXs represent a tantalising option for the future of cryptocurrency exchanges, CEXs are likely to remain the preferred option for the foreseeable future.
Its widespread adoption, user-friendly interface and high trading liquidity positions itself as the preferred platform for amateur and professional crypto traders alike.
However, should DEXs improve on their usability and liquidity, it could emerge as a worthy alternative — especially with the rise of decentralisation within financial services.
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