Exchanges CEX and DEX, what is the difference?

There are two types of exchanges in cryptocurrency markets: centralized exchanges (CEX) and decentralized exchanges (DEX). Today, you will learn what a cryptocurrency exchange can be like, explore the differences between them, and understand the risks you need to consider when trading on each of these exchanges.

Centralized exchanges (CEX), such as Binance, are online trading platforms that match buyers and sellers through an order book. Essentially, they operate much like online brokerage accounts, making them popular among investors.

Decentralized exchanges (DEX), such as OKX DEX or Uniswap, are autonomous financial protocols that operate on smart contracts, allowing crypto traders to convert one digital asset to another with all transactions recorded on the blockchain.

The main difference between CEX and DEX is that the former controls your funds while you interact on the trading platform, whereas on the latter, users retain control over their funds during trading.

But the security of funds is not the only difference between the two types of exchanges. Let’s delve into the pros and cons of each type to learn more about what each trading platform can offer and how they differ.

Let’s start with CEX.

Although centralized exchanges are considered less secure than their decentralized counterparts due to holding investors’ funds, they have a number of features and advantages that attract users to them.

First, trading volume. Centralized exchanges are usually very liquid. Binance, for example, regularly records daily trading volumes of over $30 billion. For beginners, these active platforms essentially guarantee a seamless exchange of their assets at any time. For experienced traders, CEX provides a way to move relatively large amounts of funds in and out within minutes.

Second, fiat to crypto and vice versa conversion. Centralized exchanges typically support fiat cryptocurrency on-ramps and off-ramps. This means they allow you to buy Bitcoin, for example, with US dollars. Third, naturally, are the features. Besides supporting a huge number of digital assets, CEX offers many more functions beyond exchanging one asset for another, such as margin trading, trading crypto derivatives, staking on the exchange, and margin lending.

Lastly, but not least, is ease of use. One of the appealing qualities of most CEX is their user interface. Given that most beginners are not familiar with crypto pairs or simple terms like long or short, CEX does an excellent job of guiding users into the crypto space. Some CEX platforms, like Binance, have simplified versions for users who wish to make basic trades.

Moreover, they operate almost like online brokers, thereby serving as a familiar face for traditional investors. While centralized trading platforms have many advantages for investors accustomed to their online brokerage accounts, they have several significant drawbacks.

The first significant drawback is the strict Know Your Customer (KYC) policy. For users who want to maintain privacy while trading, CEX is not a suitable exchange.

Centralized exchanges adhere to strict policies. They typically require you to upload a photo of your face and a valid ID to buy and sell cryptocurrency or withdraw funds. Know the phrase “not your keys, not your coins.” This term refers to centralized exchanges.

While CEX ensures easy trading, high liquidity, and so on, they provide you with wallets, meaning they have power over your cryptocurrency. A crypto wallet cannot be controlled by a third party. Using the famous phrase “not your keys, not your coins,” it can be confidently said that CEX wallets create a security risk for traders and investors.

Another significant drawback is the risk associated with hacker attacks on CEX exchanges. Since exchanges centrally hold users’ funds, they are prime targets for cybercriminals.

Now let’s discuss how things stand with DEX exchanges.

Decentralized exchanges have captured a significant share of the cryptocurrency trading market due to increased ease of use and growing understanding among users. Among the features that attract users to DEX, privacy and anonymity come first. To use a decentralized exchange, you typically only need to connect a wallet and sign a transaction. No identity verification is required.

The second significant advantage of decentralized exchanges is security. DEX exchanges are usually more secure than centralized ones for two reasons. First, they are non-custodial, and hackers target exchanges with a central database to extract users’ private keys and withdraw their funds. Since DEX does not store your private keys, hackers cannot access your wallet.

The second reason is the absence of unique identity checks, meaning there is no risk of personal data leaks. The third advantage of decentralized exchanges is the integration of DeFi and NFTs. DeFi and NFTs are two frontiers of the blockchain space, and DEX exchanges are strong drivers. DEX allows users to access the world of smart contracts and dApps that provide financial services, including lending and saving products, as well as NFT projects.

Although decentralized trading platforms have some significant advantages over centralized exchanges, they also have drawbacks that new crypto investors should be aware of. There are two significant downsides to working with decentralized exchanges.

First, limited trading. DEX functionality is currently limited. Features like margin trading, futures, options, etc., are usually unavailable. Second, efficiency. Decentralized exchanges are not as fast and efficient as centralized ones due to scalability issues, which most blockchains face. Centralized exchanges do not encounter this problem because they use mechanisms both on-chain and off-chain to ensure smooth operation.

Both types of crypto exchanges allow users to buy and sell cryptocurrency with differences in key elements such as liquidity, security, and ease of use.

Conclusion

For beginners looking to join the cryptocurrency space, CEX offers a simple and quick way to trade. On the other hand, DEX is more suitable for experienced traders who need privacy and complete control over their digital assets. Remember, the future lies in cryptocurrency, so do not be afraid to explore the world of digital money.