Résumé
A centralized exchange (CEX) offers cryptocurrency trading services to registered users. Although a CEX can offer its verified users various crypto products, its primary service is to connect buyers and sellers through an order book. For beginners, a CEX is the easiest way to get started without needing in-depth knowledge of blockchain infrastructure and tools.
A decentralized exchange (DEX) uses smart contracts on the blockchain to run its exchange services. In most cases, tokens will be exchanged for liquidity pools, using liquidity provided by other users in exchange for swap fees.
You don't need to register on a DEX, which means it's open to anyone with 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 don't offer the level of support that a CEX can give, and it can be easy to make irreversible errors when using them.
Introduction
If you've researched cryptocurrencies, you've probably heard of DEXs. Maybe you're already a customer of a CEX like Binance, but you want to use a DEX, or maybe you're looking to buy the latest DeFi currency that's currently not available on CEXs.
Whatever your situation, you need to know the crucial differences between a CEX and a DEX before deciding which one to use. Depending on what you want to do and your experience level, each has its pros and cons.
Why are there different types of exchanges?
If you are a beginner trader or only have experience with traditional finance, the difference between a CEX and a DEX can be confusing. A CEX functions similarly to what is found in the world of traditional markets. It is a single entity operating using an order book into which market makers and takers place orders. The order book then matches buyers and sellers, taking a small portion of the transaction as a commission.
At the heart of the operation, the order book and the entity that operates the exchange make the model centralized. To use a CEX like Binance, you must create an account and verify your identity according to local regulations. The exchange will also have custody of the assets you wish to trade on CEX after you have deposited them into your account.
A DEX is managed by smart contracts, which are self-executing pieces of code on a blockchain. An entity or project can create and help manage a DEX, but it can, in theory, run itself as long as people provide it with liquidity.
Unlike CEXs, DEXs generally do not use order books to facilitate trades. Instead, they primarily use the Automated Market Making (AMM) model. To use a DEX, all you need is a crypto wallet and a certain amount of crypto (including enough to cover any gas/transaction fees). Due to its decentralized nature, no registration or account is required from users.
For beginners, a CEX offers a more user-friendly experience and is an easier entry point. In case of any problem, you can contact the platform's customer support team. A DEX also has several advantages, but they are generally more attractive to experienced crypto users who prefer decentralization over ease of use.
Centralized exchanges: advantages
Easy to use
A CEX like Binance focuses on creating a range of ergonomic products for all types of users. Crypto beginners have access to simple conversion tools like Binance Convert, while experienced traders can use TradingView tools on the spot market. A CEX will likely also offer detailed guides as part of its services (Binance Academy is an example).
The process of registering with a CEX is similar to opening a bank account. Many of us are already familiar with this system, and technical knowledge is not essential. Most CEXs offer credit or debit card payment options, making your first cryptocurrency investment as simple as possible.
Support et protection
One of the biggest hurdles for crypto beginners when using DEXs is the training required to use decentralized tools. Crypto wallets, addresses, gas fees, and other aspects of blockchain can be unforgiving when you make mistakes. There is no system administrator to help you. So you're on your own if you lose your mnemonic phrase or send cryptocurrencies to the wrong wallet.
You can avoid these pitfalls if you trade on a CEX. For example, customer support can help you if you lose access to your Binance account, and there is no need to pay gas fees when moving your cryptocurrencies between different Binance products. These measures help users and protect them from irreversible errors that are sometimes made on DEXs.
A multitude of integrated services
A CEX can offer a wide range of integrated products and services, making it a single platform for multiple uses. On a CEX like Binance, you can access trading and staking services, an NFT marketplace, a Launchpad, a P2P exchange, and more without leaving the platform. Plus, moving funds between these services is simple. You can pay by card and even take advantage of offers from partner merchants like Travala.
Centralized Exchanges: Disadvantages
A prime target for attacks
As large centralized entities, CEXs are frequent targets of attacks, meaning any user funds stored on a CEX are susceptible to theft. Although CEXs prioritize security, they cannot eliminate the risk of hacking and theft. Over the years, several major hacks have occurred, such as the Mt. Gox hack.
Additional transaction fees
Almost every service you use on a CEX will incur transaction fees. Often they can be hidden or “built into” the service. Due to their higher operating costs, CEXs may struggle to compete with the low transaction fees offered by DEXs. However, the additional transaction fees of a CEX should be weighed against the gas fees of using a DEX, which can be considerable on some networks.
The CEX has custody of user funds
When using a CEX, you must deposit your crypto to the platform's wallet. This means that you relinquish custody of your funds by entrusting them to the CEX. Therefore, you may not be able to withdraw them at any time. This poses a problem if an exchange becomes insolvent and can result in the complete loss of your funds. This situation is similar to having your money in a bank: in the event of a bank run, you may not be able to access your funds.
Decentralized exchanges: advantages
Custody of funds
When you use a DEX, you never lose custody of your funds until a transaction or interaction is completed. This means you can move and store them however you want. If your crypto is stored in a wallet for which only you have the mnemonic phrase, you have complete control over your assets. For advocates of decentralization, this is one of the most important factors.
Data protection and privacy
When using a DEX, there is no need to provide any personal information, personally identifiable information, or trust a third party to store this data. This means your personal data is protected from bad actors who want to steal your identity. Note that when using an exchange, you are always subject to local regulations and laws.
Fewer barriers to entry
Using a DEX only requires a wallet and some cryptocurrency to trade and pay gas fees. This makes DEXs very accessible to a large group of people around the world. For decentralization enthusiasts, this is a huge benefit, and many appreciate the more private nature of a DEX. Of course, the context of local legislation should also be taken into account, as well as relevant debates on the regulation of cryptocurrencies.
Decentralized Exchanges: Disadvantages
Complexity of use and access
For a novice user, it can be difficult to understand how to navigate and use a DEX. Gas fees, liquidity pools, wallets and slippage are all obstacles to overcome. It takes time to understand how a DEX works and to invest responsibly you must always understand your tools.
Lack of fiat gateways
Historically, purchasing your first coin or token was one of the biggest barriers to gaining exposure to cryptocurrencies. CEXs now offer credit and debit card payment options for purchasing cryptocurrencies as standard. Although some DEXs are starting to offer this service using third-party providers, most do not allow the use of credit or debit cards.
Liquidity issues
DEXs, on average, have lower volumes and less liquidity than large CEXs. Market depth may be lower, and large trades on a DEX may have a greater impact on prices than if made on a CEX. Traders or investors placing high-volume orders can often find a better price by trading over-the-counter (OTC) or using a CEX with deep order books, such as Binance.
Should I use a DEX or CEX?
Currently it is much easier for a beginner to use a CEX. This eliminates the need to immediately become familiar with how the decentralized infrastructure of a blockchain works. If you encounter any problems using a CEX, a support team will help and guide you as much as possible.
Overall, the chances of making an irreversible mistake like losing access to your funds or transferring them to the wrong address are much lower with a CEX. If this is your first time being exposed to cryptocurrencies or if you prefer a more direct and easier to understand service, CEX is for you.
A DEX, on the other hand, is a great entry point into the world of DeFi. With just one wallet compatible with the Ethereum Virtual Machine (EVM), you can explore the vast universe of DeFi. A DEX is a versatile option for expert crypto users and offers a high degree of freedom.
If you are looking to invest in a wide range of new projects with low market capitalizations, a DEX is also the best choice. While CEXs often launch new tokens, DEXs still facilitate most new token sales and initial liquidity.
With the above in mind, and to help you decide quickly, refer to the following use cases for each exchange type:
Conclusion
If you are considering trying a DEX, you should do your own research beyond what is mentioned in this guide. While the benefits are appealing to some, we recommend making sure you fully understand how to use a DEX and associated tools.
For more information on the 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 change. For many, a CEX offers the right balance between ease of use and presence of support.
