Crypto exchanges are online platforms that enable investors to buy, sell, and trade cryptocurrencies — with that in mind, we created a decentralized vs centralized crypto guide in which we’ll talk about their main differences.
The main difference between CEX and DEX is that a centralized entity controls the former, while the transactions in the latter are automated. Furthermore, CEX uses order books to conduct trades, while DEX uses smart contracts.
Learn more below!
What Is a Decentralized Exchange?
What is a DEX? A decentralized exchange or DEX is a P2P platform that allows people to trade crypto coins and tokens on decentralized platforms. DEXs don’t rely on intermediaries. This means all transactions are automated, and users interact directly with each other.
Decentralized exchanges also use smart contracts and automated market makers to facilitate trading. This method of operation enables anonymous transactions, as well as lower fees.
Keep in mind that most decentralized exchanges only support trading between cryptocurrencies — users won’t be able to trade fiat for crypto. At the same time, they support a large number of cryptocurrencies, from BTC and ETH to lesser-known new tokens. This makes them ideal for professional traders.
How Do Decentralized Exchanges Work?
As mentioned above, DEXs execute trades via smart contracts. This means that buyers and sellers will be automatically connected. Moreover, they will have full control over their digital assets and private keys.
To conduct a trade, users will only need to connect their crypto wallet to the platform. They won’t have to create an account or provide personal information. After they have chosen the tokens or coins they want to trade, the platform will calculate their price via AMMs. To finalize the trade, users will have to pay network and trading fees.
The main advantages of DEXs include:
DEX traders will have full control over their crypto tokens and coins, as they will remain in their wallets until trading is completed. Moreover, users will be responsible for their transactions as DEXs do not act as mediators.
DEXs enable a high level of privacy since users won’t have to create an account to conduct a trade. They won’t have to provide personal information, and many DEX platforms don’t even ask for KYC verification.
DEX platforms are less vulnerable to hacks because users don’t share their private keys with third parties. Instead, they use cold and hot wallets to conduct transactions.
The main disadvantages of DEXs are:
DEX platforms are more suitable for professional traders, which means that beginners may find them too complex. Furthermore, users will not be able to cancel their transactions or recover their digital assets if they lose their private keys.
Lack of Fiat Trading
DEX platforms usually don’t allow trading with fiat. In addition to that, users won’t be able to use their credit or debit cards to buy cryptocurrencies.
DEXs generally have lower liquidity as they depend on the activity of their users. Hence, it will be more difficult to find suitable sellers and buyers. Moreover, transactions will be much slower.
What Is a Centralized Exchange?
What is CEX in crypto trading? CEX or a centralized exchange is a trading platform managed by a centralized entity. The role of this entity is to act as an intermediary between buyers and sellers. They can also be defined as custodians since they store the crypto assets of their users.
All transactions on CEXs take place through order books, which makes them suitable for beginners. Namely, after creating an account on the CEX platform, users will have to deposit their crypto tokens. After that, the platform will connect them with suitable buyers or sellers. However, they won’t have to conduct the trade themselves. The platform will do it for them.
Since CEXs have their crypto wallets, users will not have control over their private keys and funds. However, they will be able to use both fiat and cryptocurrencies for trading.
How Do Centralized Exchanges Work?
To conduct a trade on CEX platforms, users will have to create an account. Most CEXs will also require KYC verifications. After that, traders will be able to deposit their funds using debit and credit cards, wire transfers, or cryptocurrencies. Most CEXs will store the deposited funds of their users in cold or hot wallets.
That said, all transactions will be carried out through order books. The order books will contain the buy and sell price and the amount of available assets. These orders will remain open until another user accepts their terms. CEXs will then execute the trade.
The main advantages of trading on CEX platforms include:
Suitable for Beginners
CEX platforms are user-friendly, which makes them suitable for beginners. On them, users will get access to conversion tools and detailed guides on trading. Moreover, most CEXs offer integrated services, like staking, P2P exchanges, and NFT marketplaces. And finally, users won’t have to execute the trades themselves. The platform will do it for them.
CEXs have high liquidity since they have a large number of active traders. The advantages of high liquidity are fast transactions and a lower risk of slippage.
Higher Trade Volume
Unlike DEXs, centralized exchanges allow trading with fiat, as well as other cryptocurrencies. They also accept multiple payment options and support asset derivative trading.
The main risks of trading on CEXs are:
Susceptibility to Hacks
CEXs are more often attacked by hackers since they are responsible for storing the funds of their users. In addition, when creating an account, CEX users will have to share personal data with the platform, which can lead to identity theft. On top of that, CEXs don’t anonymize their transactions.
Lack of Control
CEX users won’t have full control over their digital assets. Instead, they’ll have to hand over their custody to CEXs. This means they won’t be able to withdraw their assets whenever they want.
CEX platforms must operate under the regulations of the jurisdictions in which they operate. As a result, certain changes in the regulations may affect their way of working. CEXs will also be allowed to share personal data of their users with authorities.
Differences Between CEX vs DEX
You can see the main distinctions between DEX and CEX in the table below:
Feature Trading Model Governance Based on Liquidity Fiat and crypto Custodial Higher fees Faster Requires KYC verification
The platform acts as an intermediary
Governed by centralized authorities
Fiat and crypto
Requires KYC verification
Decentralized With Centralized Exchange — What Should You Use?
Beginner traders should opt for CEXs. Why? First of all, they are less complex to use and they support both crypto and fiat trades. Secondly, CEXs act as a middleman between buyers and sellers — they will conduct all trades. This reduces the chance of making a mistake, such as sending the funds to the wrong address. And finally, CEXs offer faster transactions and higher liquidity.
On the other hand, DEXs are a better option for professional crypto traders who want to have full control over their digital assets. Namely, although DEXs don’t allow trading with fiat, they usually support a large number of new crypto tokens. Moreover, DEXs have lower fees, which makes them less expensive for trading. They also provide more security and anonymity.
Now that you understand the main decentralized vs centralized crypto differences, choose the platform that better suits your trading habits and experience. In short, if you’re new to crypto trading, opt for CEXs. If you are a professional trader, choose DEXs.
Keep in mind that both types of exchanges have their pros and cons. While CEXs offer higher liquidity and higher trade volume, they are also less secure. The same doesn’t apply to DEXs. Namely, they offer more privacy since users don’t share their private keys with the platform. However, they also provide slower transactions and lower liquidity.
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