Centralized Exchange (CEX) vs. Decentralized Exchange (DEX)
Technology, Marketing 8 min reading
Content
Show-
What Are CEXs (Centralized Exchanges)?
- How does CEX work?
- CEX. Advantages and disadvantages
-
What Are DEXs?
- How does DEX work?
- DEX. Advantages and disadvantages
- Conclusion
Explore more from Velas
Technology 1 min reading
Velas Expands Cross-Chain Bridging to AvalancheExciting news for the Velas community! We're thrilled to announce that Velas has extended its cross-chain interoperability by enabling bridging to Avalanche, a prominent blockchain platform known for its high throughput and low fees.
Technology, Engineering 1 min reading
Smart Contracts on SteroidsWelcome to the latest edition in our series, Exploring Velas' Innovative Technologies. Throughout this series, we delve into the cutting-edge technologies propelling Velas forward as a leading blockchain platform, reshaping the landscape...
The Forbes web resource claims that there are currently over 600 crypto exchanges in the world. Formally, they can be divided into two types: centralized ones (CEX) and decentralized ones (DEX). The first type includes such a well-known online platform as Binance, which was launched about five years ago and very soon became the world's largest cryptocurrency exchange. As for DEXs, you may have heard of PancakeSwap and Uniswap, which are standalone crypto trading solutions.
If we talk about the decentralized exchange vs centralized exchange comparison, the main difference between them is that the first type controls the financial transactions, funds, and wallets of its users, while the second type allows users to autonomously manage these attributes within the exchange. Below we invite you to analyze in more detail how these two types of crypto exchanges work, find out their main advantages and disadvantages, and perform the DEX vs CEX comparison.
What Are CEXs (Centralized Exchanges)?
We propose you start with CEX meaning in crypto. In a nutshell, CEXs (centralized crypto exchanges), such as the aforementioned Binance, Coinbase, etc., are intermediaries that are responsible for the tasks of managing and administering all transactions between end users and blockchains that place their listings within these exchanges.
Initially, this type of crypto exchange was the only one, and therefore crypto traders had no choice but to prefer the more or less popular (convenient) one. However, centralized exchanges were quite often hacked on the server side, and their users lost money stored in their accounts. Especially often such situations happened with small CEXs.
Another nuance of using centralized crypto exchanges was intra-exchange rules that could be changed at the request of developers or government organizations that regulate their business activities. In particular, as some states began to introduce severe restrictions on trading operations with cryptocurrencies, crypto exchanges came under close supervision of law-regulatory authorities. As a result, some exchanges were arrested and their users lost all the funds that were stored in their wallets.
Finally, to complete the registration procedure on such an exchange, the user must comply with internal KYC policies. Since not all crypto traders want to deanonymize themselves, centralized crypto exchanges may not be suitable for them by nature. Moreover, storing personal data on a third-party web resource, even if it is protected by advanced security protocols, is a potential step towards the theft of this data by attackers and its use for their own purposes.
How does CEX work?
The principle of operation of centralized exchanges is quite simple. For example, if a new user of a certain crypto exchange wants to buy bitcoins, they need to go through the standard procedure.
In particular, they must first go through the registration procedure to verify their identity (we are talking about KYC, which we mentioned above), indicate the details of their bank card or electronic wallet, and deposit fiat money into their exchange account. After that, the user must proceed to the procedure of purchasing the currency of their choice – in our case, this is Bitcoin.
After the purchase, the corresponding number of Bitcoin units appears on the user's personal account. Subsequently, these coins can be exchanged for any other cryptocurrency listed on a particular crypto exchange.
However, it is important to understand one nuance: the exchange acts as an intermediary for all user operations with cryptocurrency. Therefore all transactions that the user performs within it do not occur directly in the blockchain but in the database of the exchange itself. Thus, the user does not get private keys to the wallets that the exchange uses for performing these transactions.
CEX. Advantages and disadvantages
Let's start by listing the benefits of centralized crypto exchanges.
- Huge trading volumes. Centralized exchanges are incredibly liquid (even not very popular ones) – per one day, the strongest players in the crypto market perform transactions worth tens of billions of US dollars. For the end user, this means a high speed of financial operations and the absence of serious restrictions on their upper limit.
- Convenient conversion to fiat currencies and vice versa. For beginners in the field of crypto trading, this feature is a definite plus. Indeed, to start crypto trading, it is enough for them to have a regular bank card with US dollars or any other fiat currency listed at a particular exchange.
- Extended capabilities. In addition to exchanging one asset for another, centralized crypto exchanges often provide their users with additional trading options: margin trading, staking, margin lending, token trading, etc.
- User-friendliness. Since such exchanges were the first to appear, during their existence, their creators have minimized the entry threshold for beginners. Thus, if you had no experience in crypto trading before, it is better to start achieving your trading skills on one of such exchanges. Moreover, some centralized crypto exchanges have “lightweight” versions for inexperienced users.
Now let's move on to the analysis of CEXs disadvantages.
- Strict KYC policies. For traders who care about their privacy on the web, registering on the CEX will be unacceptable. The fact is that even not-so-popular centralized crypto exchanges have strict policies for identifying their customers, requiring them to provide their photo, valid ID, and other private data.
- Lack of user account control. This type of exchange can block a user's account, freeze assets, and share their personal data with the authorities if the activity and amounts of funds in a particular user's account seem suspicious to them.
- Inability to access to private keys. CEX does not provide its users with private keys to access wallets – all finances involved in transactions are in user accounts. For some traders, this is an indicator of unreliability.
- Frequent hacking attacks. In the past five years, even the most popular crypto exchanges have been hacked, and their users collectively lost billions of dollars. Also, given the fact that user data is stored in a centralized database on the server, it can also be stolen.
What Are DEXs?
Let’s continue with the DEX crypto meaning. DEXs (decentralized exchanges) are based on distributed ledger technology – blockchain. DEXs (such as BinanceDEX, Nash Exchange, etc.) operate using smart contracts that implement specific algorithms to regulate asset prices. As for transactions, decentralized exchanges use liquidity pools in which investors place their assets in exchange for rewards. In fact, this is an innovative format of crypto exchanges, and in this regard, such solutions are very often supplied with open source code and can be integrated into third-party projects.
DEXs provide their users with full control over their finances. Along with this, the loss of data (private key) to restore the wallet will mean the loss of funds stored in it. Since such keys are difficult to remember due to their length, software managers storing them can be an unobvious point of vulnerability for the DEX concept.
Another potential risk associated with using DEXs is their open source nature. So, if some fraudster finds a bug in the source code, they can take advantage of this and gain access to the finances of exchange users. That is why it is better to choose only well-known decentralized crypto exchanges.
How does DEX work?
As you can already understand, decentralized exchanges use smart contracts to trade cryptocurrencies between participants. There is no third party (intermediary) here, and thus DEXs act as peer-to-peer exchanges. At the same time, DEX never holds the assets of its users during transactions, and the transactions themselves (including the request for their execution) are performed on the basis of smart contracts and entered into the blockchain.
DEX. Advantages and disadvantages
As usual, let's start with the benefits of decentralized crypto exchanges.
- Complete privacy for end users. To become an active user of such a crypto exchange, you only need to connect your wallet and confirm the transaction. At the same time, you will not encounter any verification of your identity, which means that the risks of stealing your personal data will be minimal.
- Increased security. Decentralized exchanges are usually more secure since they do not store the finances of their users (because they do not have a centralized database), as well as private keys (which means that access to user wallets through these crypto exchanges is also impossible).
- Support for DApps and NFTs. DEX provides users with access to DApps and NFTs since this type of crypto exchange acts as the main fuel for their development and promotion to the masses.
Now, as expected, let's look at the main disadvantages of DEXs.
- Often limited functionality. The functionality of the DEX is often limited, and there are no features such as margin for futures trading.
- Low trading volume. Due to its decentralized nature, this type of crypto exchange is mostly incapable of processing large volumes of user transactions.
- Possible scalability issues. Decentralized exchanges can have relatively slow transaction speed compared to centralized ones.
Conclusion
Resuming our CEX vs DEX comparison, we can conclude that both types of crypto exchanges allow ordinary users to trade cryptocurrencies. However, if in the case of centralized crypto exchanges you get high transaction processing speed, extensive functionality, ease of use, and no restrictions on the size of transactions, then the second option will be preferable for those traders who care about their anonymity and are very worried about possible cyber attacks on the server side (while DEXs in this case do not store user funds – they are stored by the users themselves). We hope you can now make the right choice.
Stay ahead of the curve
Add your email to get hand-tailored messages only. We say no to boring newsletters and spam!