When you decide to start your crypto trading journey you will need to pick an exchange. There are 2 kinds of exchanges: centralized (CEX) and decentralized (DEX). Here is our comprehensive guide about Centralized exchanges vs Decentralized exchanges.
What’s a Centralized Exchange (CEX)?
CEX is a crypto exchange that acts as a “middleman” and oversees all crypto trades and also manages the crypto assets in their platform. When you trade one cryptocurrency for another on a centralized exchange, the transaction does not take place directly between you and the other individual. Instead, the deal is managed by the exchange.
What’s a Decentralized Exchange (DEX)?
A DEX is a crypto exchange with no third party involved. Instead of trusting your assets to a third party, like in a CEX, you keep them in a DEX. Most DEX connects to wallets, that’s why you don’t keep your crypto assets there.
With that in mind, here are some other aspects that differentiate centralized exchanges from decentralized exchanges.
Decentralized crypto exchanges offer better security than centralized exchanges, despite the fact that centralized exchanges have very strong security processes. Hackers are most likely to target centralized exchanges. Another aspect is, CEXs tend to have a thorough KYC (Know-Your-Customer) process to filter out scammers and other bad actors.
Due to previous hacking incidents involving centralized exchanges, CEXs have implemented enhanced security measures. In comparison, if a hacking incident happens in a decentralized exchange, it will be less likely of you losing your crypto assets, but not impossible. There have been cases of DEX hacks with scammers stealing millions of dollars, like this one here.
On other hand, exit scams and rug pulls are more likely to happen in a decentralized exchange. Scammers can use a DEX to generate a token that is linked to a major cryptocurrency like Ethereum. Then, fraudsters would drain the DEX pool after investors had exchanged their ETH for the new token or currency. As a result, the coin’s value plummets to nothing, leaving investors with nearly worthless coins.
As of 2021, there are over 4,000 distinct cryptocurrencies on the market.
To be listed on a CEX, an asset must meet security criteria, have trading activity, and adhere to regulatory requirements. CEX also allows more fiat on-ramp options – users can buy their first cryptos there, while DEXs don’t usually have this option.
You can list anything on a DEX. This increases the risk, but it also increases the possibility of trading fresh, in-demand goods. Everyone has milk and potatoes, but the price of that mango may rise shortly. If you don’t do your homework, you’ll wind up with a bag of rotting assets.
The liquidity offered on centralized cryptocurrency exchanges is higher. Users on CEX exchanges place orders based on market trends. As a result, several users buy and sell an asset that is in high demand. These exchanges also feature market makers, which adds to the platform’s liquidity.
Decentralized exchanges have poor liquidity because order matching takes time. Another cause of poor liquidity is a lack of popularity.
In simpler terms, centralized crypto exchanges are easier to control. In most countries, centralized exchanges are regulated, need operating licenses, and are in compliance with regulatory authorities. The biggest centralized crypto exchanges are regulated eg. Binance, Coinbase to name a few.
Decentralized exchanges, on the other hand, are difficult to regulate because of their decentralized nature. As a result, decentralized exchanges can operate in certain countries even if it is prohibited.
To Sum Up:
Now, you might have got some idea about centralized exchanges vs decentralized exchanges. When choosing a crypto exchange, consider the following:
Security: Although centralized exchanges have very good security measures, decentralized crypto exchanges provide superior security, in most cases.
Liquidity: Centralized cryptocurrency exchanges provide more liquidity compared to decentralized exchange.
Regulations: Centralized cryptocurrency exchanges are easier to regulate than decentralized exchanges.