When it comes to digital assets investment, there are two dominant types of exchange platforms: Centralised Exchanges (CEX) and Decentralised Exchanges (DEX). Currently, more than 70% of trading volume is facilitated through CEX. Do you know the differences between the two and their real use cases? Let’s dive into the characteristics of each exchange type!
What is a Centralised Exchange (CEX)?
Centralised exchanges are crypto exchanges that act as intermediaries between buyers and sellers to handle their assets. In other words, the exchange provides a place for matching the buyers and sellers.
Benefits
- Security
CEX offers an extra layer of security and reliability for transactions and trading. The order book of CEX records and authenticates digital assets transactions.Through a developed, centralised platform, transactions are more secured.
- Easier user experience
Instead of using crypto wallets and P2P transactions, which might be complicated for beginners to use, CEX allows users to log into their accounts, view their account balances, and make transactions easier.
Disadvantages
- Less privacy than DEX
With CEX, sellers and investors have to go through the Know Your Customer (KYC) process, unlike DEX where users can use peer-to-peer transactions anonymously.
- Risk of bankruptcy
CEX is usually a private corporation and is totally managed and owned by a single organisation, meaning that the company is responsible for the holdings/assets of the customers.
- Transaction fees
CEX typically charges higher fees than DEX due to their centralised nature, which requires more resources to maintain and secure the platform.
Examples
In the crypto sector, examples of centralised exchanges include Binance, Coinbase, Gemini and Kraken, etc. To use a CEX like Binance, users must create an account and go through the verification process of their identity according to the regulation. The CEX will also take custody of your assets on the platform after you deposit them into your account.
What is a Decentralised Exchange (DEX)?
A Decentralised Exchange (DEX) is a type of digital assets exchange that operates on a decentralised platform, using smart contracts and blockchain technology to enable peer-to-peer trading among users. It allows for a trustless environment, where users retain control of their assets and funds are never held by a central authority.
Benefits
- Lower transaction costs
DEX operates on a decentralised platform with lower overhead costs.
- Data protection
There is no need to submit personal data when using a DEX, making users’ personal data more secure.
Disadvantages
- Complex for beginners to use
For beginners, understanding how to use a DEX can be challenging as it takes time for users to fully understand the functions of DEX. In addition, users need to open a crypto wallet and remember the passwords and keys of the wallet.
- Less liquidity
DEX has smaller volumes and less liquidity than large CEXs, which are adopted by most users in crypto and dominate the trading volume. Users might need to take risks of the low liquidity as it can be difficult to match buyers and sellers when trading volumes are low.
Examples
Examples of DEXs include Uniswap, PancakeSwap, dYdX, and Kyber. These decentralised exchanges rely on smart contracts or blockchain.
Differences between CEX and DEX
Centralised exchanges allow users to trade fiat currency for cryptocurrency and vice versa, as well as trade between different cryptocurrencies. However, there is still a demand for a different type of cryptocurrency exchange.
Decentralised exchanges, on the other hand, offer an alternative option that eliminates intermediaries, creating what is often referred to as a “trustless” environment. These exchanges operate as peer-to-peer marketplaces where smart contracts and atomic swaps facilitate transactions, eliminating the need for an intermediary to hold assets.
Closing thoughts
Now, you’ve got there – understand the key elements of centralised and decentralised exchanges.
Each type of exchange has its advantages and disadvantages, hence, it is vital to conduct research before investing in digital assets. Although the simplest experience for a crypto beginner is using a CEX, it is still associated with some potential pitfalls.
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