If you are new to the crypto world, you will come across two types of exchanges:
- Centralized (CEX), and
- Decentralized (DEX)
Crypto exchanges work just like an online stock trading platform. You can trade, buy, or sell your coins with just a few clicks. They both provide you with all the necessary tools to trade your digital assets. The execution of the transaction, however, differs between a CEX and a DEX.
Let’s dive into how CEXs are different from DEXs and which one you should choose to make your trade.
What is a Centralized Exchange (CEX)?
Centralized Exchanges are marketplaces where a third party, usually an established organization, serves as a regulator and host to facilitate cryptocurrency trades. Whether you are making a swap, a sale, or a conversion, the centralized platform will act as an intermediary to regulate the trading process through order blocks. Binance and Coinbase are amongst the most popular CEXs, along with Gemini, Kraken, and Kucoin. All these platforms act as a middleman that regulates trade between buyers and sellers.
What is a Decentralized Exchange (DEX)?
Decentralized exchanges, or DEXs, are not controlled by any central authority. Instead, trades on DEXs happen without supervision through the use of automated procedures enabled by smart contracts. DEX gives traders a true sense of control, ownership, and anonymity while conducting their trades. Their users are not at risk of leaked private information. In fact, anonymity is the biggest reason why people choose a DEX. Seasoned investors who value their privacy prefer DEX over CEX.
Decentralized exchange platforms like Uniswap, Pancakeswap, Curve Finance, Crema Finance, Orca, etc are fast catching on in popularity. Uniswap alone has traded more than $1 trillion worth of crypto since its launch in 2018.
Both CEXs and DEXs have their unique advantages. Which one you should choose depends on what you are looking for. Here are a few factors to consider:
Ease of Getting Started
DEXs are not beginner-friendly and can be a little bit difficult to understand for new crypto traders. CEXs like Binance and Coinbase are huge platforms that invest significantly in the user onboarding process. You can choose from lite and pro versions as per your experience. They also let you buy crypto with fiat currency.
“Not your keys, not your coins.” It’s a popular expression in the crypto world—and a very important one. CEXs are custodial. That means they have ownership of your private keys. They also control how many coins you can withdraw. You will find a minimum withdrawal limit for every cryptocurrency you own. If you own less than the required amount, you won’t be able to withdraw, even though technically, the crypto belongs to you.
This is where DEXs score big points. They are non-custodial, which means you can link your private wallet and have full control of your keys and coins.
Liquidity is the strongest reason for choosing a CEX. Due to the huge number of users trading on various centralized exchanges, CEXs have higher liquidity than any other type of exchange. DEXs, on the other hand, struggle with liquidity.
Wondering why liquidity is important? Liquidity essentially means how easily an asset can be converted into cash. Low liquidity levels mean that the market can become volatile, causing a spike in crypto prices. High liquidity, on the other hand, means fewer fluctuations and more stability.
DEXs aim to offer cheaper transaction costs than their centralized counterparts. Since CEXs have intermediaries taking a cut, you'll have to pay more fees for any transaction. For example, according to this report, Uniswap DEX charges a 0.05% transaction fee as compared to CEXs like Binance and Coinbase that charge 0.1% and 0.2%, respectively.
Buying New Coins
CEXs enforce a higher standard for listing coins. If you are looking to buy exotic, new coins, or even shitcoins, you’d probably have to head over to a DEX!
The biggest drawback of centralized exchanges is that, well, they are centralized! Crypto hardliners believe this goes against the very principle of crypto creation.
Satoshi Nakamoto, who introduced the world to Bitcoin and spurred the revolutionary blockchain technology, was an idealist who floated the idea of decentralizing money. Cryptocurrency came about as an ideology to take back power from big institutions and governments that control the flow of money.
Centralized exchanges go against those ideals and are controlled by big institutional investors and private whales. CEX platform founders also own the exchanges, which means that at any moment, they can halt all operations, ban certain users from transacting, and more.
Given the sheer volume of trade on their platforms, CEXs also have to abide by government rules and regulations. Every user is required to submit their KYC documents, which include confirming your identity, and residence proof. DEXs do not ask for KYC verification. They help users avoid regulatory burdens by staying anonymous. On the other hand, CEXs provide stronger regulatory assurances like anti-money laundering (AML) standards, which can be especially important for big investors.
To sum up, go with a CEX, if you are:
- A beginner.
- Fine with the fact that your account will not be fully owned by you.
- Want to use fiat currency to buy crypto.
- OK with sharing your KYC details.
Choose a DEX, if you:
- Want anonymity.
- Are an experienced trader.
- Want to swap one crypto for another.
- Are looking for wallet security.
- Wish to buy new coins.