In brief
Centralized Exchange (CEX) provides cryptocurrency trading services to registered users. Its main service is to connect buyers and sellers on an order book, although a CEX can still offer verified users various cryptocurrency products. For beginners, CEX is the simplest way to get started without needing in-depth knowledge of blockchain infrastructure and tools.
A decentralized exchange (DEX) uses on-chain smart contracts to operate its exchange services. In most cases, it is a token swap service from liquidity pools, with liquidity provided by other users in exchange for swap fees.
You don't need to sign up for a DEX, meaning they are open to anyone with a wallet and cryptocurrency. DEX is the gateway to the world of decentralized finance (DeFi) and offers users a lot of freedom. However, they lack the support that CEX can provide and it can be easy to make irreparable mistakes when using them.
Introduce
If you're doing research into cryptocurrency, you've probably come across DEXs. Perhaps you're already a customer of a CEX like Binance but are interested in using a DEX, or maybe you're looking to buy the latest DeFi coins that aren't currently available on CEX.
Regardless of your purpose, you should know the important differences between CEX and DEX before deciding which one to use. Depending on what you want to do and your level of experience, each type of exchange has its advantages and disadvantages.
Why are there different types of exchanges?
If you are a new trader or only have experience in traditional finance, the difference between CEX and DEX can be confusing. CEX operates similarly to what you find in the world of securities — a single entity that operates using an order book in which market makers and takers take orders. The order book then matches the buyer with the seller and takes a small portion of the transaction as a fee.
The focus of operations is the order book and exchange entity, making the model centralized. To use a CEX like Binance, you must create an account and verify your identity according to local regulations. This type of exchange will also manage the assets you want to trade on CEX after you have deposited them into your CEX account.
However, a DEX is operated through smart contracts, which are self-executing pieces of code on a blockchain. An entity or project can create and help run a DEX but in theory it can run on its own as long as people provide liquidity to it.
Unlike CEXs, DEXs typically do not use an order book to support transactions. Instead, it primarily uses an automated market maker (AMM) model. To use a DEX, you only need a crypto wallet and some crypto (including enough for any gas/transaction fees). Due to its decentralized nature, users do not need to register or have an account.
For newcomers, CEX offers a more user-friendly experience and is an easier entry point. If a problem occurs, you can contact the exchange's customer support team. DEXs also have some benefits, but these are often more appealing to experienced cryptocurrency users who value decentralization over ease of use.
Centralized trading platform: Advantages
User-friendly
A CEX like Binance focuses on providing a user-friendly experience for all types of users. Those new to cryptocurrency have access to simple conversion tools like Binance Convert, while experienced traders can use spot exchange tools like TradingView. A CEX will also likely have detailed tutorials as part of its services (Binance Academy is an example).
The process of registering with CEX is similar to opening a bank account. Many of us are familiar with the system and technical knowledge is not a must. Most CEXs offer credit or debit card payments, making your first cryptocurrency investment as simple as possible.
Support and protection
One of the biggest hurdles for crypto beginners when using a DEX is getting familiar with decentralized tools. Cryptocurrency wallets, addresses, gas fees, and other aspects of the blockchain can make it impossible to fix what went wrong. There are no system administrators to provide support, so you're on your own if you lose your seed phrase or send crypto to the wrong wallet.
You can avoid these pitfalls if you trade using CEX. For example, customer support can help if you lose access to your Binance account, and there's no need to pay gas fees when moving your crypto around Binance products. These measures support users and protect them from making irreparable mistakes that people sometimes make on DEXs.
More integrated services
CEX can provide a wide range of integrated products and services, making it an all-in-one cryptocurrency store. On a CEX like Binance, you can access trading and staking services, participate in NFT markets, launchpads, P2P exchanges, and more. without leaving the platform. Furthermore, transferring money between these different regions is very simple. You can pay by card and even enjoy offers with partner merchants like Travala.
Centralized exchange: Disadvantages
Vulnerable to attack
As large centralized entities, CEXs are often the target of attacks, which means any user funds stored on CEXs are vulnerable to theft. Although CEX prioritizes security, they cannot eliminate the risk of hacking and theft. Over the years, several high-profile hacks have occurred, such as the Mt. Gox.
Additional transaction fees
Most — if not every — service you use on CEX will incur transaction fees. Typically, it can be hidden or "injected" into the service. Due to higher operating costs, CEXs may find it difficult to compete with the low transaction fees offered by DEXs. However, the additional transaction fees of CEX must be weighed against the gas fees when using a DEX, which can be quite large on some networks.
Users no longer have the right to monitor assets
When using CEX, you must deposit your cryptocurrency into the exchange's wallet. This means you give up custody of your funds by entrusting them to CEX. As such, you may not be able to withdraw them whenever you want. This is a problem if an exchange becomes insolvent and can result in you losing your funds completely. This situation is similar to storing your money at a bank — if the bank goes bankrupt, you may not be able to access your money.
Decentralized exchange: Advantages
Ability to monitor money
When using a DEX, you will never lose custody of your funds until the transaction or interaction is complete. This means you can move and store them as you like. If your cryptocurrency is stored in a wallet with a seed phrase that only you can access, 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 a DEX, you do not need to provide personal or identifying information and you can trust that information will be stored securely. This means your personal data is safe from bad guys who want to steal your identity. Note, when using an exchange, you are still bound by local laws and regulations.
Lower barriers to entry
Using a DEX only requires a wallet and some cryptocurrency for trading and paying gas fees. This makes the DEX highly accessible to a larger group of people globally. For fans of decentralization, this is a huge benefit, and many appreciate the more private nature of DEXs. Of course, this should also be considered in the context of local laws, as well as relevant debates on cryptocurrency regulation.
Decentralized exchanges: Disadvantages
Complex use
For first-time users, understanding how to navigate and use the DEX can be challenging. Gas fees, liquidity pools, wallets, and price slippage are all barriers that can be overcome. It takes time to confidently grasp how a DEX works, and to invest responsibly, you must always understand your tools.
Lack of link with fiat currency
Historically, purchasing a coin or token for the first time has been one of the most significant barriers to getting into cryptocurrency. CEX now, as a standard, offers credit and debit card options for purchasing cryptocurrency. While some DEXs are starting to offer this service with third-party providers, most still do not allow credit or debit cards.
Liquidity problem
On average, DEXs have smaller volumes and less liquidity than large CEXs. Market depth may be smaller and large transactions on a DEX may have a more significant price impact than when executed on a CEX. Traders or investors who execute large volume orders can often find better prices doing over-the-counter (OTC) exchanges or using CEX with deep order books, like Binance.
Should I use DEX or CEX?
By far the simplest experience for cryptocurrency beginners is to use CEX. You don't need any initial time to get used to the decentralized blockchain infrastructure. If you encounter any problems while using CEX, the support team will help and guide you as much as possible.
Overall, the chance of making an irreparable mistake like losing access to your funds or transferring funds to the wrong address is much lower with CEX. So if this is your first exposure to cryptocurrency or you prefer a simpler, more straightforward service, then CEX is for you.
Still, DEXs are a great gateway to the world of DeFi. With a separate Ethereum virtual machine (EVM) wallet, you can explore the vast DeFi universe. DEX is a flexible option for cryptocurrency users and offers a high degree of freedom.
If you are looking to invest in a bunch of new projects with low market capitalization, DEX is also your best choice. While CEX often launches new tokens, DEX still facilitates most new token sales and liquidity.
Consider the above and to help you decide quickly, refer to the following use cases for each exchange type:
summary
If you are considering trying a DEX, you need to do your own research beyond what is covered in this guide. While the benefits may sound appealing to some, we recommend that you make sure you fully understand how to use a benefit and the tools involved.
For more information on this topic, refer to the article What is a Decentralized Exchange (DEX)? ours. If you are satisfied with the services provided by CEX that you are using, you do not need to switch. For many people, CEX provides the right balance between ease of use and available support.
