Academy Author ◦ 22 Nov 2023 ◦ 7 min read

CEX vs DEX: Choosing Wisely

CEX vs DEX: Choosing Wisely

When you are looking for a suitable crypto exchange for daily trading, you need to take into account many factors. The first thing you need to know is that there are two main types of trading platforms - centralized exchange (CEX) and decentralized exchange (DEX). It is also necessary to analyze your own experience in the trade, the degree of control over funds, the difference in commissions on different types of exchanges, and much more. 

Experience in Trading 

Most novice traders choose CEX because almost no experience is needed to use centralized exchanges, everything is intuitively simple and understandable. At the same time, experts recommend that beginners use platforms with simple tools, without extra functionality. Some traders prefer exchanges with more instruments - and here CEX in most cases can provide more opportunities than DEX crypto exchanges. Centralized exchanges (CEX) have always been popular thanks to convenient interfaces, which simplify their use by traders at all levels. DEXs usually have limited capabilities, and their interfaces are not always user-friendly. Also, large CEX exchanges constantly declare the speed of transactions and instant withdrawal of funds at the request of users. However, there are some "pitfalls" here.

What Is DEX and What Is CEX?

For most cryptocurrency investors, the centralized cryptocurrency exchange is one of the most important tools for buying, selling, and conducting transactions.

  • CEX is a centralized cryptocurrency exchange.
  • DEX is a decentralized cryptocurrency exchange.

Centralized exchanges (CEX) and decentralized exchanges (DEX) are the majority of cryptocurrency exchanges available today. Both perform the same main function: offering cryptocurrency in exchange for fiat currency or another cryptocurrency. However, they are distinguished by the way they perform this function.

When Bitcoin was created, its main task was to facilitate the transfer of currency without any intermediaries. This was to create a path to a decentralized economy; however, the CEX exchanges go against this principle.

As the name suggests, CEXs such as Coinbase or Kraken are run by a single entity that largely acts as an intermediary between the two parties.

Centralized crypto exchanges are online platforms used to buy and sell cryptocurrencies. They are the most common means that investors use to buy and sell cryptocurrency assets.

Some investors may find the concept of a "centralized" exchange somewhat misleading since digital currencies themselves are often considered "decentralized." This suggests that an exchange of this type should also be "decentralized" so why are these exchanges so important for the success of the cryptocurrency industry as a whole?

Central Exchange Pros and Cons (CEX)

For cryptocurrency to become mainstream (or at least widespread enough), it needs millions of people to become its users. Most of these millions do not have the necessary technical skills to manage DEX transactions, so using CEX is the only way for them to become part of the crypto community.

CEX is best compared to brokerage transactions that store and transfer funds between buyers and sellers. Most exchanges suitable for beginners offer a simple, convenient design that allows anyone to trade crypto without much effort.

Another key aspect of CEX is that since they are managed by one entity, it can ensure the security of users and funds, especially in the case of disputes. 

These exchanges are also practical, offering several payment methods to buy cryptocurrency.

However, CEX has certain risks, starting with trust. If people lose confidence in the exchange, it will eventually collapse, which can lead to a loss of user funds.

User data stored in a central location is vulnerable to attacks, as has happened countless times. As CEX grows, there may be problems with its infrastructure, as increased trade requires increased capacity.

How Do Centralized Exchanges Work?

A centralized exchange, such as Binance or Coinbase, is a site or application where people can buy, sell or exchange cryptocurrencies and tokens listed on this exchange.

Let's say you want to buy Bitcoin.

You can switch to the exchange, register with bank details and pass KYC (if required), and deposit cash. The exchange will tell you the price - based on the "order book" of people buying and selling for different amounts - and you can make a transaction, and buy Bitcoin at the amount indicated on the exchange.

Next, the exchange will display the Bitcoins you bought in your account, and you will be able to exchange them for other tokens on the exchange. But in fact, you do not hold them, because you instruct the exchange to act as a repository on your behalf. Any trade you make, for example, Bitcoin's exchange for Ethereum, does not take place in the blockchain, but in the exchange's database.

Exchanges combine users' cryptocurrencies into wallets (often "hot" wallets connected to the Internet) controlled by the exchange. The exchange controls your private keys.

DEX supporters say the appeal of decentralized exchanges is security. A centralized exchange can limit your access to your cryptocurrency, limit or stop your ability to trade it, or even become vulnerable to hackers.

On the other hand, centralized exchanges tend to be much easier to use for beginners, and they can often offer fast trading because they are not related to blockchain infrastructure.

Use of Third Parties

In the term "centralized cryptocurrency exchange," the idea of centralization refers to using an intermediary or third party to help conduct transactions, purchases, or sales.

Both buyers and sellers trust this broker to manage their assets. This can be compared to a bank where the client trusts the bank with his money in it.

The reason for choosing a bank is that banks offer security and monitoring, which the user cannot perform on his own. In the case of a centralized cryptocurrency exchange, the same principle applies.

Investors trust not only that the exchange will safely conduct transactions for them, but also provide a network of users for the exchange of cryptocurrency.

In the case of cryptocurrencies, which are often stored in cold wallets, a person can lose hundreds or thousands of dollars by simply forgetting the key to the wallet. The exchange will not allow this to happen, since it protects the investor's assets.

However, as practice shows, if you lost 2FA from the exchange, then in 50% of cases the exchange does not help you restore access to it and users simply lose money. So do 2FA on as many devices as possible at once!

DEX Pros And Cons: Decentralized Exchanges

DEX features are almost polar opposites of those of CEX. Since these exchanges are independent of the central controlling entity, and since transactions occur directly between the two users, the process is much safer.

There are no servers on which funds are stored — instead, the funds leave one address and are transferred to another almost instantly.

DEXs also provide almost complete anonymity, as DEXs do not require extensive KYC to protect their users. By their very nature, DEXs cannot be closed by any government or agency because they are not physically based in anyone's jurisdiction.

The risk of fraudulent transactions in DEX is much higher. Those who tend to lose passwords and keys should also beware of these sites since DEX cannot help restore these credentials.

Designed mainly for experienced users of the crypto industry, DEX requires the buyer and seller to process the entire transaction themselves, which can take a long time.

Payment methods are also often limited, as people are not inclined to share confidential personal or bank information with third parties (we are talking about KYC).

How Do Decentralized Exchanges Work?

The decentralized exchange uses smart contracts (automatically executed protocols) to facilitate transactions between people, but the exchange does not control their coins.

DEX copes with this in one of three ways: the order book inside the chain, the order book outside the network, or the automatic market maker approach.

In the order book within the chain, each transaction is written to the blockchain. This is not only a purchase itself but also a request to buy or cancel an order.

This is an ideal version of decentralization, but the need to place everything in the blockchain can make it more expensive and slow.

Summary

Centralized exchanges can be used to conduct transactions: fiat - cryptocurrency (or vice versa). They can also be used to make transactions between two different cryptocurrencies.

Decentralized exchanges are an alternative, they do not have an intermediary ((the third party — exchange owner — serving as a middleman). These types of exchanges function as peer-to-peer exchanges. Assets are never held by the service, and transactions and trades are made exclusively based on smart contracts and atomic swaps.

The fundamental difference between centralized and decentralized exchanges is whether there is a 3rd interested person - the owner of the exchange.

Decentralized exchanges are less common and less popular than centralized exchanges.

Simply put, in a centralized exchange there is an owner who holds your cryptocurrency in his wallet (which you transferred to the exchange), and at any time, if he is a fraudster, he can steal all the funds.