The cryptocurrency industry is booming, and so are its exchanges. A CEX(centralized exchange) differs from a DEX(decentralized exchange) in many respects. As an investor, understanding the advantages and pitfalls of both a CEX and a DEX helps you navigate the course and maximize your profit potential.
Though centralized exchanges are still the dominating trend in the market, decentralized exchanges are recently emerging from ground zero in 2018 and occupy 5% of the market share due to their flexibility and cost efficiency.
The DEX emerges as a formidable force to the CEX, and you should take both seriously while deliberating over options. You can benefit from learning the following information.
See Also: the 10 Best Crypto Exchanges in Singapore
CEX vs. DEX: Key Differences
A CEX differs from a DEX in many respects: system structures, privacy, asset custody, regulatory restrictions, liquidity, investment options, security, transaction costs, and user experience. These contrasts play an essential part in choosing a crypto exchange.
At A Glance
The following summarizes the differences between CEX and DEX:
Comprehensive trading options, such as margin trading, crypto lending, cryptocurrency derivatives
Limited options like crypto trades, mining, staking, and liquidity offers
Run by executive program codes, such as smart contracts to link up with investors and liquidity providers
Control over clients’ assets
Assets held by clients
High transaction fees
Low transaction fees
Subject to the authority’s scrutiny and legal compliance like KYC and AML
Highly liquid market due to high turnover and trade volume
Low liquidity due to comparatively lower trade volume
Ease of use
User-friendly interface and mobile applications
Complex system like smart contracts
Subject to data and asset hacking and theft
Subject to data and program hacking
Popular exchanges: Kraken, Coinbase, Binance
Popular exchanges: Uniswap, Sushiswap, Curve Finance
1. Operating structures
A CEX has a highly structured system, from account opening to trading activities and asset custody. Clients can access a user-friendly, streamlined, and fully centralized trading system regarding depositing cryptocurrencies, trades, and asset custody.
A DEX is an open system where buyers and sellers look for and reach deals with mutually agreed and tailored-made terms and prices and self-support after-sale backup. The operating philosophy matches the theme of decentralized finance. People can fend off third-party interventions and surveillance.
A CEX operates in a streamlined and centralized environment, whereas a DEX works the opposite way.
A centralized exchange requires participants to register with their identity details, such as gender, identity number, address, investing appetites, and cryptocurrency information, before trading with the system. Therefore clients must disclose their personal and monetary data to exchanges. Some exchanges may have a leaking history of clients’ details.
A decentralized exchange does not require collecting clients’ data, so they can begin to trade once they log into a system. All a seller or buyer looks for is a suitable counterparty to trade cryptocurrencies. Clients can preserve their privacy when doing business with a DEX.
3. Asset custody
Like a stock exchange, a centralized exchange(CEX) keeps clients’ assets for crypto trading activities. Clients deposit their assets with an exchange, such as cryptocurrencies or hard currencies, to qualify for a buy or sell deal.
A decentralized exchange(DEX) provides a trading platform only where investors negotiate and reach their best deals using executive program codes like “smart contracts” to fulfill trades. The exchange does not hold assets for trade requirements.
Counterparties should have the know-how, such as crypto safekeeping and using “smart contracts” to complete trades. Besides, clients may risk losing private keys, which may be unretrievable if they hold crypto assets in their crypto wallets.
Centralized crypto exchanges have to register with the authority to operate. Like other financial institutions, a CEX must follow protocols and procedures to fact-find and fact-check clients before doing business. Examples are analyses of Know-Your-Client(KYC) and anti-money laundering conducted during an account opening process, as banks or other financial organizations do.
Decentralized exchanges do not store clients’ personal information, protect privacy, and offer anonymity. However, clients are also vulnerable to scams and fraud due to the lack of regulations.
Due to high trading volume and turnover, CEXs are flushed with cash flows more than DEXs.
On the contrary, DEXs lack liquidity and transparency because of subtle trading structures. Only through a transparent trading system can DEXs, as liquidity providers, improve and attract high volume and liquidity issues.
6. Investment options
CEXs provide more product alternatives than DEXs to clients due to accumulated experiences of more extended operating history. The products feature products like stock exchanges, including futures, margin trading, options investing, and leverages besides spot trades. Yet, only cryptocurrency borrowing and lending services, besides spot trades, are available on the DEX platforms.
The lack of investment choices is one primary reason DEXs attract fewer experienced traders into their trading environments. Some DEXs are now introducing the “Automated Market Maker(AMM)” system to improve liquidity for appealing to more investors. Another strategy for DEXs is using smart contracts to develop products like crypto staking and mining, which may enhance liquidity.
Both centralized and decentralized exchanges are targets of hacking, theft, and other crimes online. CEXs, despite their sophisticated and advanced technology and centralized trading platforms, are also vulnerable to data hacking and asset theft. You may have heard the news that a successful hack costs millions of dollars to a crypto exchange.
DEXs, without centralized organization structures, can also be a prime objective for hackers regarding the decentralized server network and operating system. The open-source system, like smart-contract program codes, may expose vulnerable points, which may be subject to hackers’ abuses.
CEX and DEX are facing constant security challenges in their operations, like other financial organizations. Frequent reviews, system upgrades, and improvements are necessary to fend off malicious attacks to protect clients. There are a lot of Bitcoin scams that can strip you of your hard-earned money if you are not careful
8. Transaction costs
Another distinction between decentralized and centralized exchanges is the transaction costs collected by both institutions. CEXs collect fees to cover and maintain the operations of their highly centralized and streamlined structure. An active investor may face high-turnover trading costs and threaten frequent traders against high-volume trades.
Compared to CEXs, DEXs have lower transaction costs due to their decentralized trading system and code-based, self-executing algorithm methodology.
9. User experience
Investors may find the CEX technical support and services more satisfactory than a DEX. With its efficient and concentrated structure, an investor can direct his investments from deposits to investments in easy and highly organized steps. Besides, investors can access their accounts through user-friendly websites and mobile applications.
A trading platform from a DEX allows investors multiple options in crypto trades with the flexibility offered by the smart-contract codes. However, traders must learn the features of an operating environment without central authority before investing. Besides, they have to connect their digital wallet to a trading platform, while a CEX investor only registers with the exchange for an account.
What is a CEX?
A CEX, like a stock exchange, is a trading platform where buyers and sellers trade cryptocurrencies with various currencies like SGD, US, Euro, or other crypto assets. Participants use the exchange’s official website or mobile app to invest and monitor trading activities.
A centralized exchange also facilitates keeping operations smooth by clearing trades.
Acting as a middleman, a CEX keeps a digital order book listing sales volumes and prices and matches up sales orders. At the end of a trading day, the exchange discloses the closing prices of cryptos traded.
A CEX is a custodian requiring clients to deposit crypto assets or fiat currencies to invest. A client’s account is assigned by the exchange recording his activities and asset balances.
- High liquidity: Popular exchanges like Binance, Kraken, Coinbase, and Gemini have a high trade volume and turnover. They create an abundant supply of primary cryptos and cash. Investors can quickly and easily convert from one type of asset to another.
- Various services: Besides crypto trades, a CEX offers multiple products, such as margin trading, staking, and lending services.
- User-friendly technology: Centralized exchanges provide state-of-art technology to enhance clients’ user experience in investing. Clients can access their simple but comprehensive websites and easy-to-use interface on its applications for knowing essential information and trading activities.
- Compliance: Centralized exchanges must register with the Monetary Authority of Singapore and comply with procedures as required for other financial institutions to protect clients’ details and assets.
- Confidentiality: Like banks or brokerages, a CEX follows procedures and complies with rules and regulations set by the Government, including the Know-Your-Client and anti-money laundering laws. The legal requirements expose client details to the authority and contradict the idea of decentralized finance.
- Security: Centralized exchanges are a frequent and prime target for data hacking and asset theft as they hold clients’ data and assets worth billions of dollars. Even if they claim to have a high-security system to protect clients, the news that hackers stole clients’ funds and data is a popular topic in town.
- Transaction fees: CEXs charge high transaction fees to cover system costs and operating expenses due to the complex management structures. Besides, active traders face towering expenses incurred by high volume and turnover.
What is a DEX?
The philosophy behind DEX’s existence is to uphold the initial idea of DeFi: anonymity, reduced fees, and autonomy from central management.
DEXs use mobile apps to facilitate direct dealing between buyers and sellers based on blockchain technology. The automated algorithm applying the “smart contracts” – a program code to execute trades enables trades on the platform. One of the benefits of the technology is buyers and sellers can tailor-make and bargain terms based on their criteria. Ethereum is the ideal blockchain network for DEX’s operations.
Decentralized exchanges do not hold clients’ assets and can create a “liquidity pond” where investors deposit cryptos and earn income from users looking to invest in cryptocurrencies.
Uniswap is the DEX with the most significant trade volume, according to the Global Accountancy KPMG, 2021, with a turnover of USD 2 billion. The DEXs are catching up with CEXs, though still far behind.
- Anonymity: The trading platforms for DEXs do not require intermediaries for operations, like CEXs. Besides, a decentralized exchange does not keep clients’ details, so a data leak issue does not exist.
- Fees: Clients can reduce transaction charges as DEXs do not collect middleman expenses and custodial fees.
- Security: CEXs are prime prey for hackers due to their holdings of large clients’ data and money and crypto assets. However, DEX’s operating systems may be subject to breakdowns if loopholes are available to hackers. CEXs are more vulnerable to attacks than DEXs. But clients may permanently lose their assets if they keep their private keys to electric wallets holding cryptocurrencies.
- Regulatory scrutiny: DEX clients are in a better position than CEX ones as DEXs are not subject to the authority’s regulation until now. They do not go through strict legal compliance as their counterparts do.
- Low liquidity: Numerous DEXs face low trading volumes and turnover due to covert features. Despite improvements like the “Automated Market Maker” system, few DEXs offer enough liquidity to shrink active traders’ or high net-worth investors’ appetite for betting in decentralized exchanges.
- Complicated procedures: Investors may find it hard to access counterparts for trades as no central system like price books are available to sellers and buyers. Besides, clients should learn how to make terms on the system, like writing smart contracts to execute a trade. Beginners may confront more obstacles in using DEXs.
CEXs have a central authority and streamlined and user-friendly systems attracting clients but charging higher fees and being subject to hacking risks. DEXs offer anonymity, low fees, and tailor-made deals to investors, but the procedures are challenging to use for beginners. Investors invest in either based on their experience and personal criteria.
- A CEX operates with features like a stock exchange.
- A DEX provides tailored-made deal services for investors.
- CEXs have more product offerings than DEXs.
- DEXs collect lower fees than CEXs.
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