The difference between CEXs and DEXs
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Now, when you first got involved in crypto, you must have heard a lot about decentralization and anonymity. I guess those are among the reasons that got you interested in the first place. Then you head over to Binance or Coinbase, and they ask for your identity and even demand a KYC procedure. You’d probably be like, “What is this? I was told I was going to be anonymous in crypto!’ Then a crypto guru tells you about the exciting APY you’d get when you provide liquidity on a decentralized exchange. So you decide to head over to Raydium or Uniswap. Getting there, you’d probably relax knowing that your privacy is protected. You love it, but the user interface seems a bit more complicated compared to Binance. Then you wonder “What’s the difference between a Centralized exchange and a Decentralized exchange?” We will talk about the difference between a centralized exchange or a CEX and a decentralized exchange or a DEX.
A centralized exchange is an online platform used to trade crypto assets. They act as an intermediary between traders, matching buyers and sellers via an order book. CEXs are similar to online brokerage platforms. This is why their user interface is familiar to newbies used to traditional financial institutions. They offer services such as trading crypto, storage of crypto assets, and margin trading.
Therefore, decentralized exchanges are autonomous financial protocols that run on smart contracts. They enable crypto traders to convert one coin to another in a decentralized way, without any need for an intermediary. DEXs replace a centralized authority with a smart contract. A quick definition of what a smart contract is: “A smart contract is a piece of code that allows different people to enter into an agreement.”
First of all, we’d go over the benefits of CEXs then we’d talk about their disadvantages. After that, we’d focus on the pros and cons of decentralized exchanges. Finally, we’d discuss the major difference between DEXs and CEXs.
Pros of Centralized exchanges:
Although centralized exchanges are often criticized for their regulations, they have a wide array of benefits that attract millions of crypto traders.
1. Ease of use
A great advantage of centralized exchanges is their friendly user interface. They’re similar to online brokers, so newbies find them familiar and easier to use than decentralized exchanges. Centralized exchanges are usually the first place beginners go to trade assets, as they are beginner-friendly.
2. Available currencies
CEXs allow you to buy crypto assets with fiat currencies like the dollar or pounds. On centralized exchanges, you can easily exchange crypto assets for fiat and fiat for crypto as often as you want.
3. Trading Volumes and liquidity
CEXs have very high liquidity and trading volumes. This guarantees that crypto-assets can be exchanged immediately at any time. Traders and investors can move large amounts of money in and out without worrying about liquidity.
Since CEXs are centralized and regulated by the government, they can be held accountable for any scandal or wrongdoing. Also, CEXs have insurance.
5. More features
CEXs offer traders more options than DEXs, including crypto derivatives, margin lending and trading, exchange staking, etc.
6. Customer service
Most centralized exchanges have robust customer service available to help newbie crypto traders.
Cons of centralized exchanges
Although centralized exchanges have many benefits that attract millions of traders, they also have their bottlenecks.
1. Custodial wallets
You must have heard of this phrase: Not your keys, not your coin. That means that if you’re not in control of your private keys, then the coins in your wallet are out of your control too.
Although CEXs provide high liquidity, users have no control over their crypto. This is because CEXs hold your private keys, so they can technically confiscate them and censor you. Crypto wallets should be non-custodial, but users must sacrifice their keys to enjoy the benefits of CEXs. CEXs act as custodians over your funds and are in control of your private keys
2. KYC policies
Centralized exchanges have strict KYC or know your customer policies. These policies require you to upload a picture of your face, your social security number, bank information, and a valid identity card. Because the government regulates them, they have no choice but to conform to strict KYC and anti-money laundering (AML) systems. So to trade crypto on a centralized exchange, you must sacrifice your privacy. So if you’re very concerned about your privacy, stay away from centralized exchanges.
CEXs are prone to hacks and scams from scammers. We’ve seen this in the past, and there’s a likelihood they’ll happen again. We’ve seen different centralized exchanges lose billions to cyber-criminals. So this is an important factor to note.
Because The government regulates CEXs, there’s a risk that the financial regulations they’re under may change in the future, thereby jeopardizing users’ funds. If a CEX ever falls under government investigation, there are chances that your funds may be frozen for the period of that investigation.
Pros of DEXs
1. Privacy and Anonymity
On DEXs you’re not required to provide your identity. There’s nothing like KYC protocols. You only need to connect your wallet to enjoy decentralized services. Your privacy is assured.
2. Non-custodial wallet
DEXs offer non-custodial crypto wallets. This means that you’re in control of your private keys. You’re in control of your funds. No one can censor you.
However, you must ensure to hold your private keys dear because if you ever lose them, you have lost access to your funds.
Decentralized exchanges are more secure than centralized exchanges. Because there are no identity checks, there’s no risk of leaking your private information. Also as they are non-custodial there’s no chance of hackers accessing your private keys because you are the only person holding them. This is in contrast to centralized exchanges where there’s a central database with users’ private keys, giving cybercriminals something to attack.
4. DeFi integration
Decentralized exchanges let you access the DeFi ecosystem. Making you access Dapps that offer services like lending, borrowing, and savings.
5. No regulations
DEXs are built on a smart contract and do not need a central authority. So there are no regulations.
6. Thousands of crypto coins are available on DEXs.
On DEXs, anyone can list a coin. There are no regulations or criteria for listing coins. So there are thousands of coins available to trade on DEXs.
Cons of DEXs
Despite their benefits of privacy and anonymity, DEXs also come with their disadvantages.
1. Low liquidity
Sometimes DEXs suffer low liquidity. This can make prices shoot up or crash depending on the amount of token bought. If a lot of tokens are bought, the price may shoot up. But if a trader sells a lot of tokens, the price of that token may crash.
2. No option to exchange crypto for fiat
On DEXs you can only exchange crypto for crypto, there’s no option to exchange crypto for fiat. Also, on some DEXs you can only exchange crypto coins on the same ecosystem. For example, you can only trade a coin on the Ethereum ecosystem with another coin on the same ecosystem.
3. No support
There’s no support on DEXs. No customer support. If you make a mistake on DEXs, there’s no one to talk to. No one to call.
Although some DEXs have community forums, these forums are made up of other users volunteering to help. They’re not required to help you. This means if you make a mistake like buying a scam coin or sending your money to a different address, there’s little chance of getting them back.
4. More chances of being scammed
Because there are no regulations or criteria for listing coins, any scammer can list a scam coin with the same name as a real coin. If you mistakenly buy this coin, your money is gone.
5. Open code
Decentralized exchanges are built on the blockchain. The code is open for everyone to see. So a hacker can experiment with the code and try to find a vulnerability. If they succeed, they can attack the blockchain.
6. Unfamiliar User interface
Newbies often have difficulty interacting on DEXs because of the unfamiliar user interface.