This week, CMC Academy explains the difference between centralized and decentralized exchanges for crypto traders with pros and cons.
Privacy and security are two major concerns of crypto users. While some crypto enthusiasts reside in not-so-friendly countries, many simply don’t trust third-party services with their assets. Therefore, at some point, you might find yourself wondering if you should trade your asset on a centralized exchange (CEX) or a decentralized one (DEX). Even though the decision will be yours to make, we can definitely help you out by explaining the main elements of both types of exchanges with their pros and cons. Let’s dive in!
Centralized exchanges, like Binance, are online marketplaces that bring buyers and sellers together. With an order book
, buying and selling prices are matched and trades take place. These exchanges charge fees for every transaction; however, these fees vary from exchange to exchange.
Centralized exchanges are custodial, allowing you to store the crypto you own on the platform. The platform goes to great lengths to keep your crypto safe, but there are cases in history where exchanges have been hacked and lost the tokens of many customers. CEXes are usually compliant with government regulations, and often require customers to hand over personal information through the KYC
Most CEXes are easy to use, even for beginner traders. Since they are centralized organizations, they usually come with customer support teams that can help you out if you run into trouble. This can be a great benefit of a centralized exchange for newcomers and existing traders.
— as the name suggests — cut all forms of third parties out the equation, bringing buyers and sellers together on the blockchain.
No single entity controls the exchange, but liquidity is provided by anyone who wishes to contribute to liquidity pools
. DEXes usually charge very little to no fees for a transaction, and users only pay the cost of using the blockchain.
Uniswap’s vision puts it well:
“Inspired by Ethereum's vision, we have long committed to the ideals of permissionless access, security, and immutability, all indispensable components for a future where anyone in the world can access financial services without fear of discrimination or counterparty risk”
By cutting out the third party, DEXes, like Uniswap, return control to the user. The exchange has no power to freeze your assets or stop you from transacting. For this reason, the idea behind the DEX resonates with many Bitcoiners, who share the same values of individual freedom.
Contrary to the CEXes, a DEX user stores crypto themselves on a cold or hot wallet
. This ensures they always have access to their coins, while also transferring the responsibility of protecting their assets. As a DEX user, you have to beef up your digital security; hacks or losing (access to) your wallet will mean your money is gone forever.
Pros of Using a Centralized Exchange
CEXes are designed to offer an easy-to-use platform to crypto users. They usually have a secure wallet to store coins, customer support and regular product updates to keep the platform up-to-date with the latest market needs. Most well-regarded CEXes also make sure to do extensive research on tokens they list to protect you from rug pulls
Usually, popular CEXes don’t have liquidity issues, meaning that you can convert your entire portfolio into fiat money in mere seconds without any problems. Moreover, fiat support is another advantage of a CEX, as this feature does not exist on almost any DEX yet. There are ways to convert on-chain
tokens to fiat, but that’s beyond the scope of this article.
CEXes come with different features and trading products, such as leverage trading
trading and staking
, all in one place. Most of these tools exist in the decentralized sphere too, but all on different applications.
Cons of Using a Centralized Exchange
A major drawback — to some — is how CEXes generally ask for personal information to unlock the full experience. If you want to trade under the radar, CEXes are not the place to go. A
dditionally, when you store your tokens on a centralized exchange, it has to process your withdrawal before you can truly own them. There have been cases where exchanges froze assets of their users for various reasons.
Both these drawbacks might not be a concern to you, but many people got into crypto from an idealist point of view, making these issues more important to them.
Another drawback of not storing your coins yourself is security. Even though major CEXes have stronger firewalls than most governments, there are multiple cases in history where exchanges have been hacked and lost customer funds.
Pros of Using a Decentralized Exchange
Decentralized exchanges offer a platform to do transactions with privacy and anonymity. There is no need to hand over personal information — just sign the transaction and you’re good to go.
A great benefit of DEXes is security. As mentioned earlier, hackers generally target major exchanges to make a big sum of money in one go. With DEX trading, your private keys
are in your possession only, and hackers will only get into your wallet if they directly target you. As long as you keep a low profile and exercise the necessary caution, you will avoid risks of a hack when using a DEX.
Trading on a DEX also gives you an edge over most market participants. Promising new projects are listed on DEXes first, and it usually takes a while for them to be listed on centralized exchanges.
Cons of Using a Decentralized Exchange
As we discussed, DEXes are built directly on the chain. As a result of that, they only support tokens running on the same chain as the DEX itself runs on.
DEXes are generally slower to execute trades than CEXes. Depending on how busy the chain is, a transaction can take quite some time (and cost you some high gas fees) before completing, whereas a centralized exchange executes trades in milliseconds. If speed is important to you, DEX trading may not be for you.
After reading this article, you probably already have an idea of what kind of exchange suits your needs best. There is no set-in-stone approach to markets — it all depends on what you are comfortable with and what you want to achieve.
Experiment with different platforms to get a better picture of the differences and figure out what works for you. You might even find that there is a time and place in your trading for both types of exchanges.
Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form.
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