DEX vs CEX. What is the difference? Advantages & Disadvantages


If you are considering buying or selling crypto, your first port of call will probably be an exchange.

These are the digital marketplaces where most crypto trading takes place. You have probably heard of a few: Binance, Kraken, Uniswap and so on.


Most are centralised and use a business model similar to traditional institutions like the New York Stock Exchange. But a growing number are decentralised and radically rethinking how exchanges can work. Here, we explain the pros and cons of each type.


CEX — Centralised Exchanges


A centralised exchange, such as Binance, CEX.io, Kraken, or OKEx, has its own order book. In this, every order is recorded and validated. To ensure correctness, data is exchanged internally via dedicated servers and goes through centralised security processes.


As a rule, CEXs operate under regulatory supervision and have extensive know-your-customer policies built-in. Simultaneously, centralised exchanges actively crackdown on fraudsters following applicable laws to prevent money laundering.


Beginners in particular use this type of exchange, as the centralised structure allows for a user-friendly platform that makes buying and managing digital currencies particularly easy.

Behind a CEX is a for-profit company. To create a good user experience, these companies often offer a wide range of support services. They also allow the purchase of cryptocurrencies against fiat currency and usually feature an extensive range of trading pairs. Centralised exchanges have fixed fees, which are incurred when trading. Conceptually, a crypto exchange works on the same principle as any other exchange. A matchmaking algorithm regulates supply and demand, and the order book stores users’ orders.


DEX — Decentralised Exchange


A decentralised exchange also offers the core functions of a CEX. These include order books or Automated Market Maker , a trading venue, a matching system, and security functions. The difference to centralised exchanges is that all these functions are decentralised. To this end, a DEX is not based on internal servers and its own IT infrastructure but acts as a decentralised application (dApp) on a blockchain.


Users of decentralised exchanges use exchanges such as Uniswap, Bisq, or GDEX mainly due to two characteristics: anonymity and high security.


DEX are anonymous because almost no user data is needed for trading. Often, users only need a public address to be allowed to trade on a decentralised exchange. There are no third parties (authorities or financial regulators) monitoring or imposing regulations on the exchange as a decentralised application. Another reason for its success is its high level of security. While CEX users have no control over their private keys, a DEX does not offer an integrated hot wallet, and the private keys remain in possession of the users.


Now let’s talk about advantages of CEX


High trading volume and high liquidity

As CEX is famous and used by a lot of active users who buy/sell their assets, it results in high trading volume compared to DEX. High trading volume effect on high liquidity as well. Liquidity means the ability of an asset to be converted into cash or other cryptocurrencies. Liquidity is important for many reasons because it makes a crypto exchange less vulnerable to market manipulation.


Fiat-cryptocurrency trading and vice versa

Centralised exchanges support fiat to crypto on and off-ramps, this makes people start their crypto journey easier as they can just exchange their fiat money for cryptocurrency.


High level of functionality

CEX works not only as a crypto trading platform but also provides other functions or features, such as margin trading, crypto derivatives trading, exchange staking, and margin lending.


User friendly

CEX's user interfaces are easy to understand even for crypto newbies and the processes and procedures can be internalised quickly. CEX also provides easy and uncomplicated access to the respective trading options.


Fast transaction

CEXs can$217 billion transactions are flowing process every transaction fast and almost in real-time, helping traders to react directly without waiting if the market is changing. This happened because CEX is handled by a centralised organisation company that can process thousands of orders per second.


Disadvantages of CEX


Possible of hacking compared to DEX

CEX mechanism is trust-based, as CEX store their user crypto asset and have integrated wallets that are part of their system (custodial services). This mechanism is beyond the user’s control. Therefore, users have to give full trust to exchanges that their money is safe. This condition also makes CEX a prime target for cybercriminals.


Under government regulation

As centralised exchanges are under the control of regulators, third-party providers, and legal regulations. So, to prevent exchanges from money laundering, operators are required to collect extensive data about their customers (KYC). This regularity is contrary to the basic idea of cryptocurrencies.


And do not forget about advantages of DEX


High security from hacking

There are two reasons that make DEXs more secure than CEXs. First, DEXs use the non-custodial framework, where users have full control over their assets, so hackers cannot get into user wallets unless they expose them by themselves. Hackers mainly targeted the central database of exchanges to extract users’ private keys and withdraw their funds. Second, because no identity verification process is required, there will be no risk of leaking private user data.


Low-cost fee

A large number of trading pairs take place through the DEXs network, making the trading fee at DEXs low.


No fraud from any third party

There will be no fraud since there are no centralised organisations or third parties that act as financial regulators or authorities who monitor or impose regulations on the exchange as a decentralised application.


DeFi and NFT Integration

DEXs use a smart contract that allows the users to access smart contracts' world and DApps that provide financial services, including lending and savings products, as well as NFT projects.


Provide a variety of tokens

Anyone can mint an Ethereum-based token and create a liquidity pool for it. This activity makes DEXs provide a variety of tokens.


Cannot be closed by the government

Without the presence of third parties including the government, DEXs is free from government requirements, regulations, or monitoring and can not be closed by the government.


Disadvantages of DEX


Low liquidity compared to CEX

DEX is still relatively a new concept and there are fewer traders compared to CEX therefore DEX liquidity is lower. Nevertheless, with the growth of DeFi, asset liquidity on DEX has increased rapidly.


Limited functionality

The graphical user interfaces on DEX are still too complicated, especially for beginners. Functions such as limit orders, margin trades, or stop losses are not available for many traders. Nonetheless, most DEX tries to adapt the functionalities known from CEX, so in the future, DEX will be more user-friendly.


To make a summary:

  • DEX stands for Decentralised exchange while CEX stands for centralised exchange. They both refer to platforms where crypto users can exchange, buy and sell cryptocurrency, seamlessly.


  • CEX offers benefits like guaranteed liquidity, exchanging crypto to fiat, ease of use, have entail concerns about security, lack of user complete ownership and lack of anonymity.


  • DEX offer complete ownership of coins and control of private keys, the possibility of governance tokens and complete anonymity but can be more complex to learn and use for beginners, do not allow fiat payments can have limited liquidity.

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