TL: DR
A centralized exchange (CEX) offers Bitcoin exchange services to registered users. Though a CEX may provide verified users with a choice of crypto goods, its core feature is typically matching buyers and sellers with an order book. A CEX is the simplest way for newbies to get started without prior knowledge of blockchain architecture and technologies.
To support its exchange services, a decentralized exchange (DEX) employs on-chain smart contracts. Users frequently trade liquidity pool tokens for liquidity that other users are offering in exchange for transaction fees.
A DEX does not require registration; anyone with a Bitcoin wallet can use it. DEXs are the entryway to the world of decentralization (DeFi) and give users a lot of control. They lack the support that a CEX can provide, and it is easy to make irreversible mistakes when utilizing them.
Introduction
The world of cryptocurrency has witnessed significant growth, and with it, the rise of different types of exchanges. Two popular types are Centralised Exchanges (CEX) and Decentralised Exchanges (DEX). Both serve as platforms for buying, selling, and trading cryptocurrencies, but they operate on fundamentally different principles. Understanding their differences is crucial for anyone looking to dive into the world of crypto trading. Depending on what you need to do and your degree of experience, everyone has advantages and disadvantages
Why Are There Different Exchange Types?
If you are a newcomer to trading or have only had expertise with traditional banking, the contrast between a CEX and a DEX can be perplexing. A CEX is a single entity that uses an order book to place orders from market makers and market takers, similar to a stock exchange. The order e-book then connects clients and merchants, deducting a modest fee from each transaction.
The order book and exchange entity are at the heart of the process, allowing for model centralization. To utilize a CEX, such as Binance, you must first open an account and verify your identity in accordance with local regulations. When you deposit assets on the CEX, the exchange takes custody of them.
Smart contracts, which are code pieces that execute automatically on a blockchain, power a DEX. As long as users provide liquidity, a DEX can operate independently of any business or project that created it.
In contrast to CEXs, DEXs normally do not employ order books to enable commerce. They rely primarily on the AMM (automated market maker) model instead. To utilize a DEX, all you need is a crypto wallet and enough cryptocurrency to cover any gas or transaction fees. Users do not need to register or create accounts in decentralized systems.
A CEX is more user-friendly and offers a more accessible starting point for beginners. If something goes wrong, contact the exchange’s customer care department. A DEX has different advantages; however, those are frequently more attractive to professional crypto customers who prefer decentralization over usability.
Centralized Exchanges:
Centralized exchanges (CEXs) are online platforms that facilitate the buying, selling, and trading of cryptocurrencies and other digital assets. They are run by a centralized organization and act as an intermediary between customers by keeping their money safe. Here are some of the pros and cons of using centralized exchanges:
Pros:
User-friendly:
A CEX such as Binance prioritizes user friendliness for all consumers. Beginners to cryptocurrencies have access to straightforward conversion tools such as Binance Convert, whereas seasoned traders can utilize the TradingView tools on the Spot Exchange. As part of its services, a CEX will likely offer comprehensive guides, such as the Binance Academy.
Creating an account with a CEX is analogous to establishing a bank account. Many of us are already acquainted with this system, so technical expertise is not required. The majority of cryptocurrency exchanges (CEXs) accept payment via credit or debit card, making your first cryptocurrency investment as easy as possible.
Support and Protection:
Getting used to decentralized tools is one of the most challenging aspects of using DEXs for crypto novices. When errors are made with cryptocurrency wallets, addresses, gas fees, and other blockchain-related aspects, the consequences can be severe. You are on your own if you lose your seed phrase or send crypto to the incorrect wallet, as there are no system administrators to offer assistance.
These risks can be avoided if you trade on a CEX. For instance, customer support can assist you if you lose access to your Binance account, and there are no gas expenses associated with moving your cryptocurrency between Binance’s products. These measures aid users and safeguard them against the irreversible errors that are occasionally made on DEXs.
More combined services
A CEX can provide an extensive selection of products and integrated services, transforming it into a one-stop shop for cryptocurrencies. On a CEX like Binance, you can gain access to trading and staking services, an NFT marketplace, a launchpad, and a P2P exchange, among other features, without exiting the platform. Moreover, transferring funds between these various locations is straightforward. You can pay with a credit card and even receive discounts from partner merchants like Travala.
Cons:
Availability to strike
As large centralised entities, CEXs are frequently attacked, making any user funds stored on a CEX vulnerable to thievery. Even though CEXs prioritize security, they cannot eliminate the possibility of hacking and larceny. Numerous high-profile breaches have occurred over the years, such as the Mt. Gox hack.
Added transaction costs
Almost every service you use on a CEX will incur a transaction fee if not every service. It is frequently concealed or “baked into” the service. CEXs may struggle to contend with DEXs’ low transaction fees given their higher operating costs. However, the additional transaction fees of a CEX must be measured against the substantial gas fees of a DEX on certain networks.
No user control over assets
When using a cryptocurrency exchange, you must deposit your cryptocurrency into its wallet. By entrusting your funds to the CEX, you relinquish control over them. Consequently, you might not be able to withdraw them whenever you desire. This is problematic if an exchange becomes insolvent, as you may lose all of your funds. This situation is analogous to storing currency in a bank; you may be unable to access your funds during a bank run.
Decentralized Exchanges
Decentralized exchanges (DEXs) are platforms that facilitate the direct peer-to-peer trading of cryptocurrencies and digital assets without the need for a central intermediary. Here are the pros and cons of using decentralized exchanges:
Pros:
User Control and Security:
In DEXs, users retain control of their private keys and funds throughout the trading process. This reduces the risk of hacks or breaches, as users are not required to trust a central entity with their assets.
Privacy:
DEXs often require minimal or no personal information for trading, providing users with a higher level of privacy compared to centralized exchanges.
Global Access:
DEXs are available to users on a global scale, without the need for borders or legal barriers.: Decentralized exchanges often operate on public blockchains, allowing users to verify and audit transactions independently. Many DEXs do not require users to undergo Know Your Customer (KYC) verification, allowing for anonymous or pseudonymous trading.
Cons:
Complex to use and enter
It can be difficult for a first-time user to grasp how to access and use a DEX. Gas fees, liquidity pools, wallets, and slippage are all potential roadblocks to overcome. It takes time to fully comprehend how a DEX works, and in order to invest safely, you should always understand your tools.
A lack of Fiat on and off ramps
Historically, one of the most significant obstacles to acquiring crypto exposure was the purchase of your first coin or token. As a matter of course, CEXs now accept credit and debit cards for cryptocurrency purchases. Although some DEXs are beginning to offer this service through third-party suppliers, the majority still do not accept credit or debit cards.
Problems with liquidity
DEXs, on average, have lower volumes and less liquidity than huge CEXs. Market depth can be reduced, and huge trades on a DEX may have a greater price impact than on a CEX. Traders or investors placing large volume orders can typically find a cheaper price by doing over-the-counter (OTC) trades or using a CEX with extensive order books, such as Binance.
Is it better to use a DEX or a CEX?
Using a CEX is by far the most straightforward experience for a crypto novice. It eliminates the learning curve associated with decentralized blockchain technology. If you encounter any problems when using a CEX, a support team will assist and guide you as much as possible.
Overall, the possibilities of making an irrevocable error, such as losing access to your funds or transferring them to the incorrect address, are substantially smaller when using a CEX. If you’re new to cryptocurrency or prefer a more clear, digestible service, a CEX is for you.
A DEX, on the other hand, is a fantastic entry point into the world of DeFi. You can explore the huge DeFi cosmos with a single Ethereum Virtual Machine (EVM) wallet. A DEX is a diverse and liberating choice for cryptocurrency power users.
A DEX is also your best bet if you want to invest in a diverse selection of fresh projects with tiny market capitalizations. While CEXs frequently launch new tokens, DEXs continue to support the majority of new token sales and liquidity.
Final Thoughts
If you want to check out a DEX, you should do your own research in addition to what is described in this tutorial. Though the advantages may sound enticing to some, we recommend that you thoroughly learn how to use one and its accompanying tools.
For more details, see our article, What Is a Decentralized Exchange (DEX)? There is no need to switch if you are satisfied with the services provided by the CEX you are currently using. For many, a CEX provides the ideal blend of usability and support.