Centralized Exchange (CEX) vs. Decentralized Exchange (DEX): What’s the Difference?
If you’re new to cryptocurrency trading, you may be considering using a centralized exchange (CEX) like Binance, Coinbase, or Kraken, among others. However, recent events such as the FTX drama may have promoted you to consider switching to a decentralized exchange (DEX). Regardless of your story, here is that you should know about the difference between CEX and DEX to help you decide which one to use.
How do CEXes work?
Let’s investigate the CEX vs DEX argument by contrasting each sort of transaction on its own.
The initial form of trading platform for investors and traders of crypto assets, CEXes are comparable to traditional stock exchanges. As the name implies, they depend on a centralised organisation or authority to exchange cryptographic assets. In that area, some of the most well-known platforms include Coinbase, Binance, Kraken, and Gemini.
Order books often serve as the foundation of a centralised exchange. Every trader’s buy and sell orders, along with the specified amount of cryptocurrency and the preferred buy or sell price, are recorded in the order book. The trade can be carried out when matching buy and sell orders are linked.
What do DEXes do?
A new class of cryptocurrency trading platform called DEXes has arisen to offer an alternate method of trading cryptocurrencies without the need for a middleman. In essence, decentralised exchanges rely on smart contracts to execute deals rather than centralised authority.
Uniswap, PancakeSwap, GMX and Deri Protocol are some of the well-known decentralised exchanges available today. Furthermore, not all DEXes are created equal. Some employ the above-discussed order book mechanism, while others are built as Automated Market Maker (AMM) structures or are conceived as DEX aggregators. These cryptocurrency trading platforms may have increased the functionality of centralised exchanges, but they also have some restrictions.
We have so far identified a few key differences between centralised and decentralised exchanges. Depending on what you want to do and your level of experience, each has its advantages and disadvantages.
Custodial (CEX) vs non-custodial (DEX)
When using a central exchange (CEX), you are required to deposit your cryptocurrency into the exchange’s wallet, which means that you give up control of your funds. This can be an issue if the exchange becomes insolvent, as you may not be able to withdraw your funds at your convenience, potentially leading to a loss of your funds, such as the FTX drama.
DEXes, in contrast to centralised exchanges, are non-custodial and don’t demand that traders give the exchange custody of their tokens in order to execute a trade. Smart contracts allow users to have complete control over their assets during the whole transaction process.
Regulations
Exchanges for cryptocurrencies are subject to laws, which might be very different from one country to the next. For instance, the Bank Secrecy Act governs cryptocurrency trading platforms in the United States (BSA). Decentralized exchanges are currently not heavily regulated due to its decentralised structure and anonymous operations, nonetheless. Although Know Your Customer (KYC) and anti-money laundering (AML) regulations must be followed by CEXes, DEXes now have far broader latitude in that area.
Decentralized exchanges can now provide traders with anonymity and greater flexibility because of this. Users benefit from an additional layer of protection provided by decentralised exchanges’ anonymity, which prevents any personal information from getting into the wrong hands.
User Experience
User experience is also crucial when contrasting CEX and DEX in their present iterations. In terms of convenience, centralised exchanges often beat DEXes. They provide investors and traders an approachable cryptocurrency trading solution that, in most circumstances, is simple enough for complete beginners.
Decentralized exchanges have additional levels of complexity because they are still in their infancy. For someone who has never used a decentralized exchange(DEX) before, it can be difficult to figure out how to use and navigate it. For instance, users must link a digital wallet like MetaMask to the site in order to take part in the trade.
Liquidity
Exploring the question of CEX vs DEX also brings up the important distinction of liquidity.
DEXes often struggle with low liquidity, which can make it difficult to attract large traders to these platforms. While efforts have been made to address this issue through liquidity pools and automated market maker liquidity models, creating sufficient liquidity remains a challenge. Currently, CEXs tend to perform better than DEXes due to their larger user bases and greater liquidity.
When considering which type of exchange to use, you should consider two main factors: ease of use and control of your funds. Regardless of which type of exchange you choose, it’s important to do your own research to protect your wealth in the long term.
Deri, your option, your future!
Deri is the DeFi way to trade derivatives: to hedge, to speculate, to arbitrage, all on chain. With Deri Protocol, trades are executed under AMM paradigm and positions are tokenized as NFTs, highly composable with other DeFi projects. Having provided an on-chain mechanism to exchange risk exposures precisely and capital-efficiently, Deri Protocol has minted one of the most important blocks of the DeFi infrastructure.
About Deri Protocol
Deri, your option, your future!
Deri is the DeFi way to trade derivatives: to hedge, to speculate, to arbitrage, all on chain. With Deri Protocol, trades are executed under AMM paradigm and positions are tokenized as NFTs, highly composable with other DeFi projects. Having provided an on-chain mechanism to exchange risk exposures precisely and capital-efficiently, Deri Protocol has minted one of the most important blocks of the DeFi infrastructure.
