In the cryptocurrency markets, there are two different types of exchanges: centralized (CEX) and decentralized exchanges (DEX).
You may be familiar with centralized big cryptocurrency exchanges such as Coinbase, Binance, BKEX, or Upbit. They were long-time favorites among cryptocurrency traders due to their better liquidity and reduced transaction fees.
The crypto market has changed and new participants have emerged like the decentralized exchange Uniswap or Sushi Swap.
The differences between the two exchanges are discussed in this guide.
Due to the increase in demand, decentralized financial applications (DeFi) have prompted a push for decentralized transactions (DEX). This type of trading venue is an exchange that operates directly on a cryptocurrency without a central governing institution. Traditional cryptocurrency trading is made possible by DEX as one of the full ranges of decentralized apps. The advantage is that users always have access to their private credentials and can trade right away without logging in.
Centralized exchanges, on the other hand, are called CEX. An exchange for cryptocurrencies that uses its own equipment is known as a CEX. In contrast to a DEX, the exchanges are constantly run by a third party. Users are drawn to centralized exchanges because of its high liquidity and rapid transaction interchange. But in this instance, the customer has no control over his login information and is fully reliant on the transaction.
II. Centralization exchanges
Centralization of the exchange essentially means that each trade there takes place with a centralized intermediary. The centralized exchange has its order book, where every order is recorded and validated. All the data is stored and exchanged between exchange servers. Additionally, transactions and user information go through a centralized security process.
To access the exchange, users have to sign up by providing their bank details and personal data. This is the part of KYC and AML practices, which aim to prevent money laundering and have to be followed by every centralized exchange.
1. Pros of Centralized Exchanges
Centralized exchanges typically provide a platform that is easier to use. They make it simple and easy for users to access cryptocurrency trading. For people new to cryptocurrency, this is very important.
Trading speed is typically significantly higher than on DEX because the entire process doesn’t take place on a blockchain and the network nodes don’t need to be updated in real-time.
Lower transaction fees
Due to the fact that CEX trading fees are fixed, they are typically lower than those charged by decentralized exchanges.
Trading with fiats
Centralized exchanges, as opposed to DEXs, let customers purchase cryptocurrency for fiat money.
2. Cons of Centralized Exchanges
More legal regulations
Government regulations that are very rigorous have a limit on centralized exchanges. For instance, it is necessary to uphold the rigorous criteria of the identification verification procedure.
From a technical point, you lose control of your money when you put it on a centralized exchange. Your money is transferred to connected wallets under the exchange’s management.
The private keys of users are also extracted by CEXs. They won’t function as your keys anymore. Therefore, the exchange must sign the transaction on your behalf if you want to withdraw your money.
This is a key factor in the migration of many traders to decentralized exchanges.
Risk of leaking private user data
Crypto customers must supply a lot of information because of KYC procedures. Due to the fragility of this information, a security issue exists even before trading begins. Particularly in the case of smaller, lesser-known exchanges, this can result in a lack of user confidence.
III. Decentralized Exchange
Decentralized exchanges resemble centralized ones in many respects. The discrepancies, nevertheless, are more than noticeable. Trade on decentralized exchanges is dependent on a blockchain (most often Ethereum or the Binance Smart Chain). Smart contracts are used to carry out trading between users; orders are carried out on-chain. As a result, during the entire procedure, the exchange does not assume control over the assets of users.
On the DEX market, cross-chain exchanges are a very promising new innovation. However, the majority of them exclusively use one blockchain, namely Ethereum or the Binance Smart Chain.
1. Pros of Decentralized Exchanges
Due to the fact that most DEXs do not operate as an intermediary in parties’ transactions, they are exempt from KYC and AML regulations. The convenience of creating your own DEX over CEX is a result of this.
No third parties involved
Decentralized trading’s basic idea is the elimination of third-party suppliers. A peer-to-peer or peer-to-contract model is used for all transactions.
Full control of your assets
The user’s assets or private keys are not kept by a decentralized exchange. Therefore, money is in the user’s hands during the entire trading process.
More diversified crypto assets
Tokens that aren’t listed on CEXs can be traded on the DEX platform.
2. Cons of Decentralized Exchanges
Even yet, the trading volume on CEXs is significantly higher than on DEXs. Liquidity is lower as well.
Although it is not the standard method, CEXs frequently provide cheaper costs when it comes to trading fees.
A traditional exchange is more user-friendly than a decentralized one.
Both types of transactions have advantages and disadvantages of their own. The success of CEX, however, greatly supports the use of traditional platforms by a number of traders. In addition, several CEX are currently enhancing their own versions or integrating DEX capabilities into their networks after realizing the power spread via decentralized trading. As a result, it will cause the two versions to merge in the future at the proper, practicable interfaces.
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