Summary
A centralized exchange (CEX) offers cryptocurrency exchange services to registered users. Its main service is typically matching buyers and sellers in an order book, although it may offer other crypto products to its verified users. For beginners, a CEX provides the simplest way to get started in this world without the need for extensive knowledge of blockchain infrastructure and tools.
A decentralized exchange (DEX) uses on-chain smart contracts to carry out its exchange services. In most cases, users trade tokens in liquidity pools, with liquidity provided by other users in exchange for swap fees.
On a DEX, there is no registration required, meaning they are open to anyone with a wallet and cryptocurrency. DEXs are the gateway to the world of decentralized finance (DeFi) and give users a lot of freedom. However, they lack the support that a CEX can provide. At the same time, in a DEX it can be very easy to make irreversible mistakes when using it.
Introduction
If you've been researching the crypto world, you may have already come across a DEX. Maybe you're already a customer of a CEX, like Binance, but you're interested in using a DEX, or maybe you want to purchase a new DeFi coin that's not yet available on CEXs.
No matter what your story is, 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 offers its own advantages and disadvantages.
Why are there different types of exchanges?
If you are new to trading or only have experience in traditional finance, the difference between a CEX and a DEX can be confusing. A CEX works similarly to what you might find in the stock market: an individual entity that operates using an order book into which market makers and takers enter orders. The order book then matches buyers and sellers, and takes a small portion of the transaction as commission.
At the center of this operation is the order book and the exchange entity, which make the model centralized. To use a CEX, such as Binance, you must create an account and verify your identity in accordance with local regulations. The exchange will also take custody of the assets you want to trade on the platform after you deposit them into your CEX account.
A DEX, for its part, is executed 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 itself as long as people provide liquidity to it.
Unlike CEXs, DEXs do not typically use order books to facilitate trading. Instead, they primarily use the Automated Market Maker (AMM) model. To use a DEX, you only need a crypto wallet and cryptocurrencies (including enough to pay gas and transaction fees). Due to its decentralized nature, users do not need to register or create an account.
For newbies, a CEX offers a more user-friendly experience and is a simpler entry point. If something goes wrong, you can contact the exchange's customer support team. A DEX also offers several benefits, but they are generally more attractive to power users who value decentralization over ease of use.
Centralized exchanges: advantages
Easy to use
A CEX like Binance focuses on providing an intuitive user experience for all types of users. Newcomers to the crypto world have access to simple conversion tools, such as Binance Convert, while more experienced traders can use the spot exchange's TradingView tools. A CEX is also likely to have detailed guides as part of their services. Binance Academy is an example of this.
The registration process for a CEX is similar to opening a bank account. Many of us are already familiar with this system, and technical knowledge is not a requirement. Most CEXs offer credit or debit card payment options, making your first crypto investment easier.
Support and protection
One of the biggest obstacles for cryptocurrency beginners when using a DEX is getting used to decentralized tools. Crypto wallets, addresses, gas fees, and other aspects of the blockchain can be ruthless if you make a mistake. There are no system administrators to offer assistance, so you'll be on your own if you lose your seed phrase or send cryptocurrency to the wrong wallet.
If you trade on a CEX, you can avoid these drawbacks. For example, customer support can help you if you lose access to your Binance account, and you don't have to pay gas fees when you move your cryptocurrencies between different Binance products. These measures support users and protect them from making the irreversible mistakes that some people experience with DEXs.
More integrated services
A CEX can offer a wide variety of integrated products and services, making it a one-stop crypto shop. On a CEX like Binance you can access trading and staking services, NFT marketplace, Launchpad, P2P platform and much more without having to leave the platform. In addition, moving funds between different areas and products is simple, you can pay by card and even enjoy special offers with partner merchants, such as Travala.
Centralized exchanges: disadvantages
Susceptibility to attacks
As large centralized entities, CEXs frequently become targets of attacks, meaning that user funds stored in a CEX are susceptible to theft. Although CEXs prioritize security, they cannot eradicate the risk of hacking or theft. Over the years there have been several major attacks, such as the so-called Mt. Gox.
Additional transaction fees
Virtually every service you use on a CEX will incur a transaction fee, which can often be hidden or included in the service. Because they have higher operating costs, CEXs may have difficulty competing with the low transaction fees offered by DEXs. However, the additional transaction fees of a CEX must be weighed against the gas fees charged by DEXs, which can be high on some networks.
The user gives up custody of their assets
When using a CEX, you must deposit your cryptocurrencies into their wallet, which means you give up custody of your funds by entrusting them to the CEX. Therefore, you may not be able to withdraw them whenever you want. This is problematic if the exchange becomes insolvent, which can lead to the loss of your funds. This situation is similar to storing your cash in a bank: during a financial panic, you may lose 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 you store your cryptocurrencies in a wallet whose seed phrase only you know, you have complete control over your assets. For proponents of decentralization, this is one of the most fundamental factors.
Data protection and privacy
When using a DEX, there is no need to provide personally identifiable information or trust that a third party will store it securely. So your personal data is safe from malicious people who want to steal your identity. Please note that when using an exchange, you are still subject to local laws and regulations.
Lower barriers to entry
Using a DEX requires only a wallet and a few cryptocurrencies for trading and paying gas fees. This makes DEXs very accessible to a larger group of people around the world. For fans of decentralization this is a huge benefit and many value the more private nature of DEXs. Of course, they must also be considered in the context of local legislation, as well as relevant debates on cryptocurrency regulation.
Decentralized exchanges: disadvantages
Complex use and access
For a newbie, understanding how to navigate and use a DEX can be challenging. Gas fees, liquidity pools, wallets, and slippage are all potential hurdles you need to overcome. Understanding and having the confidence to use a DEX can take time, and to invest responsibly, you should always understand your tools.
Lack of fiat gateways
Historically, purchasing your first coin or token was one of the most significant barriers to gaining exposure to crypto. Currently, CEXs offer credit and debit card payment options as standard for purchasing cryptocurrencies. Although some DEXs are starting to offer this service with third-party providers, most do not yet allow the use of credit or debit cards.
Liquidity difficulties
On average, DEXs handle smaller volumes and offer lower liquidity than large CEXs. Market depth may be less and large trades on a DEX may generate a more significant impact than on a CEX. Traders and investors who trade high volume orders can find a better price with over-the-counter (OTC) trades or using a CEX with deep order books, such as Binance.
Should you use a DEX or a CEX?
By far the simplest experience for a cryptocurrency beginner is the CEX. Eliminates the initial learning curve associated with decentralized blockchain infrastructure. If you face any problems with a CEX, the customer support team of the platform in question will be able to help and guide you as much as possible.
In general, the chances of making an irreversible mistake, such as losing access to your funds or transferring them to the wrong address, are much lower on a CEX. So, if it is your first time exposing yourself to cryptocurrencies or if you prefer a simpler and more digestible service, the option for you is a CEX.
On the other hand, a DEX is an excellent gateway to the DeFi world. With a single Ethereum Virtual Machine (EVM) wallet, you can explore the vast DeFi universe. A DEX is a versatile option for advanced crypto users and offers a high degree of freedom.
If you are looking to invest in a wide variety of new projects with low market caps, a DEX is your best option. While CEXs often launch new tokens, DEXs still lead the majority of new token sales and liquidity.
Taking the above into account, and to help you decide instantly, check out the following use cases for each type of exchange:
Conclusions
If you are considering trying out a DEX, you should do your own research beyond what this guide includes. Although the benefits are attractive to some, we recommend making sure you fully understand how to use it and its associated tools.
Para obtener más información sobre el tema, consulta el artículo Qué es un exchange descentralizado (DEX) . Si estás satisfecho con los servicios ofrecidos por el CEX que usas actualmente, no es necesario cambiar. Para muchos, un CEX ofrece el equilibrio perfecto entre facilidad de uso y asistencia al cliente.