TL;DR

A centralized broker (or exchange) (CEX) offers cryptocurrency trading services to registered users. Typically, its main service offers an order book that matches buyers and sellers, although a CEX can also offer many other crypto products to its verified users. For beginners, CEX provides a simpler way to get started without the need for advanced knowledge of blockchain infrastructure and tools.

A decentralized exchange (DEX) uses on-chain smart contracts to execute its trading services. In most cases, it swaps tokens from liquidity pools, using liquidity provided by other users in exchange for swap fees.

It is not necessary to register with a DEX, meaning they are open to anyone who has a wallet and some cryptocurrencies. DEXs are the gateway to the world of decentralized finance (DeFi) and offer users a lot of freedom. However, they lack the support that a CEX can offer and there is a greater likelihood of making irreversible mistakes when using them.

Introduction

If you are doing your research on cryptocurrencies in general, you will probably come across information about DEXs. Maybe you are already a customer of a CEX like Binance but are interested in using a DEX, or maybe you want to buy a new DeFi coin that is not yet available on CEXs.

Regardless of the reason, it is important to know the main differences between a CEX and a DEX before deciding which to use. Each has its advantages and disadvantages, depending on your goals and experience.

Why are there different types of brokers?

If you are a new trader or only have experience with traditional finance, the difference between CEX and DEX can be confusing. A CEX works in a similar way to what we find in the world of stocks — a single entity operates an order book on which market makers and market takers create orders. The order book then matches buyers with sellers, taking a small portion of the transaction as a fee.

The order book and the exchange are the central components of the operation, making this a centralized model. To use a CEX like Binance, you must create an account and verify your identity in accordance with local regulations. Furthermore, after depositing your assets at CEX to make trades, the broker will have custody of them.

A DEX, however, is executed through smart contracts, which are self-executing codes on a blockchain. An entity or project can create and help run a DEX, but a decentralized exchange can, in theory, run itself as long as people provide liquidity to it.

Unlike CEXs, DEXs typically do not use an order book to facilitate transactions. They mainly use a model called automated market maker (AMM). To use a DEX, you just need a crypto wallet and some cryptocurrency balance (including enough for transaction/Gas fees). Due to its decentralized nature, users are not required to register or create accounts.

For newbies, CEX is a good starting point as it offers an easier and more accessible experience. If something goes wrong, you can contact the broker's customer support team. DEXs also have several benefits, but are generally more attractive to more experienced crypto users who value decentralization over ease of use.

Centralized brokers: advantages

Easy to use

A CEX like Binance focuses on providing easy experiences for every type of user. Crypto beginners have access to conversion tools like Binance Convert and experienced traders can use the Spot platform's TradingView tools. Additionally, a CEX often has detailed guides and information about its services (Binance Academy is an example).

The registration process for a CEX is similar to opening a bank account. Many are already familiar with this system and no technical knowledge is required. Most CEXs offer payment by credit or debit cards, which makes your first crypto investment much simpler.

Support and protection

When using DEXs, one of the biggest obstacles for beginners in the crypto sector is getting used to decentralized tools. Crypto wallets, addresses, gas fees, and other aspects of blockchain technology can be unforgiving when you make mistakes. A DEX does not have a system administrator to offer assistance, so you are on your own if you lose your seed phrase or send crypto to the wrong wallet.

By using a CEX for your trades, you avoid these problems. For example, if you lose access to your Binance account, customer support can help you and you don't need to pay Gas fees to move your cryptocurrencies between Binance products. These measures support users and protect them against irreversible errors that sometimes happen on DEXs.

More integrated services

A CEX typically offers a wide range of integrated products and services, making it a complete crypto platform. On a CEX like Binance, you have access to trading and staking services, an NFT marketplace, launchpad, P2P brokerage and much more, all on the same platform. Furthermore, it is very simple to transfer resources between these different areas. You can pay by card and also take advantage of promotions from partner merchants, such as Travala.

Centralized exchanges: disadvantages

Susceptibility to attacks

As large centralized entities, CEXs are often targets of attacks, meaning any user funds stored on a CEX are susceptible to theft. Although CEXs prioritize security, it is not possible to completely eliminate the risk of hacking and theft. Over the years, there have been several high-value hacker attacks, such as the Mt. Gox case.

Additional transaction fees

Almost all — if not all — services you use on a CEX charge transaction fees. Fees can often be hidden or "included" in the service. Due to their higher operating costs, CEXs may struggle to compete with the low transaction fees offered by DEXs. However, it is important to consider the additional transaction fees of CEXs and the Gas fees of DEXs, which can reach considerable amounts on some networks.

Users do not have custody over assets

When using a CEX, you must deposit your cryptocurrencies into your account's wallet. This means that you give up custody of your funds, entrusting them to the respective CEX. Therefore, you will not always be able to remove them whenever you want. This is problematic, because if the broker declares bankruptcy or has problems, you could lose all your funds. This is a similar situation to storing your money in a bank — in the event of a bank run, you may not have access to your funds.

Decentralized exchanges: advantages

Custody of funds

When using a DEX, you never lose custody of your funds until a trade or interaction is completed. This means you can move and store them as you wish. If your cryptocurrencies are stored in a wallet and only you have access to the respective seed phrase, then you have full control over your assets. For advocates of decentralization, this is one of the most important factors.

Data protection and privacy

When using DEXs, there is no need to provide personally identifiable information and you don't have to worry about responsibly storing your information. In other words, your personal data is protected against malicious users who may try to use your identity. It is important to note that when using a broker, you are still subject to local regulations and laws.

Fewer barriers to entry

To use a DEX, you just need a wallet and some cryptocurrencies to make trades and pay Gas fees. This makes DEXs highly accessible to a wider group of people around the world. For supporters of decentralization this is a great benefit, and many value the more private nature of the DEX. Of course, all of this must also be considered in the context of local legislation, as well as relevant debates on cryptocurrency regulation.

Decentralized exchanges: disadvantages

More complex and less accessible

For a first-time user, understanding how to navigate and use a DEX can be challenging. Gas fees, liquidity polls, wallets and slippage are all potential obstacles to overcome. Users typically need time to understand how a DEX works. To invest responsibly, it is important to learn about the tools available on DEXs.

Fewer options for fiat currencies

Historically, purchasing your first coin or token has been one of the most significant barriers to gaining crypto exposure. Today's CEXs, by default, offer options for purchasing cryptocurrencies with credit and debit cards. While some DEXs are starting to offer this service with third-party providers, most still do not allow the use of credit or debit cards.

Liquidity problems

DEXs generally have smaller volumes and less liquidity than major CEXs. On a DEX, market depth may be shallower and large trades may have a more significant impact on the price than if they were executed on a CEX. Traders or investors who execute large volume orders often find better prices when trading over-the-counter (OTC) or on CEXs that offer order books with greater depth, such as Binance.

Should I use a DEX or a CEX?

Without a doubt, a CEX offers a simpler experience for a beginner in the crypto world. It removes the initial learning curve associated with decentralized blockchain infrastructure. If you have any problems using a CEX, you can seek help and guidance from a support team.

Overall, the chances of making an irreversible mistake, such as losing access to your funds or transferring them to the wrong address, are much lower with a CEX. Therefore, if it is your first time trading with cryptocurrencies or if you prefer a more direct and easy service, a centralized exchange will be the most suitable option for you.

A DEX, on the other hand, is an excellent gateway to the DeFi sector. With a single Ethereum Virtual Machine (EVM) wallet, you can explore the vast DeFi universe. DEX is a versatile option for more advanced crypto users and offers a high degree of freedom.

If you intend to invest in a wide range of new projects with low market capitalization, a DEX will be the best option. While CEXs launch new tokens, DEXs facilitate most new token sales and contribute to liquidity.

Considering what was discussed above, and to help with your decision, consult the following use cases for each type of broker:

Final considerations

If you're thinking about using a DEX, it's important to do your own research and seek out information beyond what we've mentioned in this guide. While the benefits are attractive to some, we recommend that you fully understand what a DEX is and what tools each one offers.

For more information on this subject, see our article What is a Decentralized Exchange (DEX)? . If you are satisfied with the services offered by the CEX you are using, there is no need to switch. For many, CEX offers the perfect balance between ease of use and support services.