CEX vs DEX: A Quick Comparison between Types of Crypto Exchanges

When taking a step into acquiring and investing in cryptocurrencies, one major point of entry for most individuals (if not all), is a medium/platform for actual purchase, trading and exchanging of coins & tokens. The platforms that facilitates these operations are called Crypto Exchanges, and are of two (2) types — Centralized Exchange (CEX) & Decentralized Exchange (DEX).

Based on a series of outstanding features/method of operations, a CEX and a DEX are highly distinctive. In this short article, we describe both, and review the main differences between a CEX and a DEX.

What is a CEX (Centralized Exchange)

A Centralized Exchange (CEX) is a crypto exchange owned and operated by a single authority. These type of crypto exchanges are managed by companies or organizations that oversee the infrastructure, user accounts and trading functions. It performs the function of middlemen connecting cryptocurrency buyers and sellers by matching their orders in an "Order Book". To use a CEX, users typically need to register, complete Know-Your-Customer (KYC) verification procedures and fund their platform wallets. On registration, a user creates their account by using their personal login information (email and password) and thereafter can access their accounts with it.

A notable aspect of exchanges is the liquidity they provide. By centralizing transactions, CEXs connect buyers and sellers, establishing a robust trading environment. They often offer various trading options like Margin Trading, well as various Order types such, as Limit Orders and Stop-Loss Orders. CEXs are mostly viewed as a crypto "on- & off-ramp", as they permit deposit of fiat currencies for crypto purchases and withdrawal of fiat back to traditional bank accounts.

For a beginner, Centralized Exchanges (CEX) are predominantly favoured as a choice to use, but nevertheless they come with some drawbacks eg. Users must entrust their coins and assets to the Exchange's wallets, exposing them to hacks and thefts; and must rely on the Exchange's integrity in managing their funds and safe-guarding their data.

Examples of top Centralized Exchanges (CEXs) based on Trust Score are Binance, Coinbase Exchange, ByBit, Kraken and KuCoin.

What is a DEX (Decentralized Exchange)

A Decentralized Exchange (DEX) on the other hand, is a type of crypto exchange that operates using blockchain technology as it's underlying element, enabling peer-to-peer (P2P) cryptocurrency trading without intermediary involvement or central authority. Decentralized Exchange platforms operate using smart contracts that automatically and permissionlessly execute trades based on conditions, removing the need for users to transfer funds to a central wallet. Users can trade directly from their wallets, with full control of their assets and without any account registration or KYC procedures needed (thanks to it's decentralized design!)

DEXs are created by teams of people but they do not control execution of trades. A team would very well manage the platform's interface and website stability, however the core functionalities — execution of trades — is permissionless. A DEX can operate smoothly provided users supply liquidity to pools which simultaneously allows efficient trade executions with very low price impact. A user who provides and locks liquidity in the pool is called a Liquidity Provider; and to incentivize them to leave their liquidity in the pool, they earn a percentage of fees from all swaps/trades carried out on the DEX depending on their share in the pool.

A significant advantage of Decentralized Exchanges (DEXs) is the heightened control they provide. Heightened in the sense that a user does not have to relinquish absolute control of their assets by transferring them to an address they do not have the private keys or seedphrase of (as in the case of CEXs); and do not have to trust any entity with their funds when making swaps/exchanges. Asides that, KYC requirements are non-existent on DEXs, allowing users to make their transactions anonymously and confidentially.

Nevertheless, DEXs may lack trading features and advanced functionalities such as Margin Trading and Limit Orders (although as the technology improves, more of such advanced tools are being built into them). They often encounter challenges related to liquidity since trades occur directly, the pool of buyers and sellers may be smaller compared to CEXs. This can lead to decreased liquidity levels, resulting in wider spreads between swaps/trades.

Examples of popular Decentralized Exchanges (DEXs) include Uniswap, PancakeSwap, Sushi, Raydium.

Main Differences Between Centralized and Decentralized Exchanges (CEX vs DEX)

The primary differences between a CEX and a DEX resolve around ownership structures, security, trading capabilities, ease of use etc.

Ownership and Control;

CEXs are managed by an entity or organization, necessitating users to trust the platform with safeguarding their funds. On the contrary, DEXs function on a peer-to-peer (P2P) network where users have autonomy over their funds without reliance on an authority. This setup allows users to maintain ownership of their assets without the need to place trust in a party.

Liquidity and Trade pairs

CEXs typically boast higher liquidity levels when compared to exchanges. This is primarily due to such exchanges having a user base that contributes to deposits and pools liquidity from various sources. Their centralized nature allows for creation and management of wide trading pairs. DEXs however rely on users themselves for liquidity for token pairs, and because the user base is more often smaller, it can potentially lead to decreased liquidity and limited trading choices.

Asset Security & Storage

With respect to asset security, CEXs are tasked with protecting user funds, but are also targets for cyber attacks. While reputable CEXs implement security protocols, it is the duty of users to apply those security settings on their accounts (eg. 2FA, anti-phishing code for emails etc) as there is still a risk of fund breaches if a user mismanages their account. Whereas DEXs offer better asset security by allowing users to control their keys and assets non-custodially. Nonetheless, users of DEXs must ensure the safety of their wallets and private keys/seedphrase.

Impermanent Loss Risks

Impermanent Loss is a risk associated with liquidity providers on DEXs. It refers to the potential decrease in value of an asset that liquidity providers might possibly face due to price fluctuations of their asset while locked in a pool. Conversely, end users on CEXs do not expose themselves to this risk as users transact assets at market prices directly.

Token Swaps and Trade execution

Decentralized Exchanges leverage blockchain technology for token exchange among users without requiring an intermediary. Thanks to smart contracts, which allow for automated and trustless transactions. In contrast, Centralized Exchanges necessitate users to deposit their assets on the platform and depend on order matching systems.

User Interface, Customer Support, Fiat On & Off ramps

CEXs are generally known to offer better interface and robust customer support comparable to DEXs, catering to both beginner and advanced users alike. DEXs often lack in the area of customer support, however, lots and lots of teams who set up DEX platforms usually maintain a community forum for discussion and quick help. While DEXs provide direct crypto-to-crypto swaps, fiat on & off ramps are often absent — an area where CEXs excel in.

Which Type of Crypto Exchange is Suitable For You?

Making a decision on the type of crypto exchange suitable for you involves taking a series of factors into account and consideration. These factors can encompass your desired level of control and ownership, trading pairs available, the necessity for advanced trading functionalities, a better user interface and even presence of customer support especially for beginners. Whether you lean in favour of using a CEX over a DEX (or vice versa) for your crypto trades, always prioritize risk management — educate yourself on the risks associated with each type of crypto exchange and utilize security measures, like two-factor authentication (2FA), strong passwords and hardware wallets.

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_{Disclaimer: All opinions, news, research, analyses or other information contained in this article are provided strictly for informational purposes only, and does not constitute investment advice. Cryptocurrency products are currently unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Faucet Crypto (“the website”), including its staff, is not affiliated with and does not endorse nor sponsor any of the mentioned services within this article. Conduct your own thorough research by contacting financial experts before making any investment decisions.}