What is The Difference Between Centralized Exchange (CEX) Vs Decentralized Exchange (DEX)? Over the years, the cryptocurrency industry has experienced a lot of growth and this has increased the need for platforms where users can trade their digital assets. Due to this need, centralised and decentralised exchanges have gained prominence in the industry, each with their own peculiarities and standout features.
Having a clear understanding of how these types of exchanges work will help you navigate crypto trading with ease.
What is a Centralised Exchange?
A Centralised Exchange is a platform where users can buy, sell and trade cryptocurrencies with a central authority overseeing and facilitating these transactions. Coinbase, Binance and Kraken are some examples of centralised exchanges. Users trust these platforms to safeguard their assets, manage order books and execute trades. Think of them as your traditional brokerage firm.
So, how do CEXs work?
The operations of this type of exchange are quite clear and easy to understand. In a centralised exchange, users are required to create accounts, undergo a KYC verification process and deposit funds. The platform's servers manage the trading engine, which matches and sells orders.
All trades occur off-chain. This means trades are processed on the exchange database rather than a blockchain. Once a trade is successfully executed, it reflects in the user's account.
Centralised exchanges offer liquidity by allowing users to trade a long list of assets in a short period due to the number of active users on the platform. In return for this convenience CEXs provide, users pay fees for trading, withdrawing and depositing assets.
What is a Decentralised Exchange?
A decentralised exchange functions much more differently. Due to its decentralised nature, there is no central authority to oversee transactions. This means that users can trade directly with one another all thanks tof smart contracts. Smart contracts are computer codes that work according to preset commands. Unlike centralised exchanges, DEXs use blockchain technology and rely on automated protocols to execute trades. Uniswap, Sushiswap and Pancakeswap are some examples.
So, how do they work?
DEXs allow users to have much more control compared to centralised exchanges. You can trade tokens directly from your wallet without making deposits into the platform itself. This gives users more control on their assets as opposed to a centralised platform like Binance.
Primarily, DEXs rely on Automated Market Makers (AMMs) to facilitate trading. In an AMM-based DEX, users provide liquidity to pools by depositing tokens. The automated protocol then uses these pools to match buyers and sellers. This removes the need for centralised control since trades are conducted on-chain.
Centralized Exchanges Vs Decentralized Exchanges (Differences)
The main difference between both exchanges is ownership, but there's a lot more to it.
On decentralised exchanges, users have full custody of their assets and can trade directly with one another. On centralised exchanges, the case is different. The platform holds custody of assets and conducts the exchange for users rather than trading directly with one another.
Centralised exchanges charge various fees like trading fees, withdrawal fees and sometimes even listing fees for projects. These fees have a fixed percentage, but they could become costly for those who trade in high volumes while withdrawing large sums.
The fees on decentralised exchanges are usually network gas fees and they fluctuate depending on network congestion. While DEXs charge less compared to CEXs, gas fees could skyrocket in periods of high demand.
Decentralised exchanges only allow users to exchange crypto assets while centralised exchanges can be used to conduct exchange from fiat to cryptocurrency and vice versa.
Centralised exchanges are usually subject to regulatory oversights by government bodies. This is why most CEXs require users to undergo KYC verification to comply with Anti-money laundering (AML) laws.
Decentralized exchanges, on the other hand, are unregulated and usually don't require identity verification. This makes DEXs a popular choice for those who prefer being anonymous on-chain.
Compared to decentralised exchanges, centralised exchanges process transactions more quickly because they use off-chain matching systems designed to handle a large volume of transactions.
On the flipside, decentralised exchanges conduct transactions on-chain and they require miners to validate these transactions before adding them to the block. This makes transactions slower than we have it on CEXs like Binance.
Conclusion
Centralised and Decentralised exchanges both have distinct features and modes of operation which make them unique. For traders who give more priority to convenience, centralised exchanges are the obvious choice, but don't forget this is in exchange for privacy and full control over assets.
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