Decentralized Exchange vs Centralized Exchange

Decentralized Exchange vs Centralized Exchange 1024 1024 Crypto Rand Group
What is a CEX?

Decentralized exchanges (DEX) and centralized exchanges (CEX) are two different types of cryptocurrency exchanges. Each has its advantages and disadvantages. In this blog post, we will compare and contrast these two exchange types and help you decide which is better for you!

Differences Between Centralized Exchanges (CEX) and Decentralized Exchanges (DEX)

When you are trying to buy or sell cryptocurrencies, you will most likely do it through either a centralized or a decentralized crypto exchange. If you are new to crypto trading, your easiest point of entry will be a centralized exchange since these offer an easy way to purchase digital currencies for fiat money.

If, however, you decide to stay involved with crypto and start to trade tokens regularly, you will need to use both types of exchanges. At this point, you will want to know how they work so you can decide which option is best to use for any given trade.

What is a centralized exchange?

Centralized Exchanges (CEX) are similar to any other financial service provider or broker. They are run by registered companies and regulated by government agencies. Users can create an account on their website, where they can deposit and trade fiat money and cryptocurrencies listed by the exchange.

They require users to trust the exchange with their funds. The exchange holds custody of your cryptocurrencies, which means that you don’t own them outright.

To set up an account, centralized exchanges also require users to provide personal information and sometimes undergo a KYC process.

How does a centralized exchange (CEX) work?

When you create an account on a centralized crypto exchange and complete the verification process, they provide you with a set of digital wallets, both for fiat money and cryptocurrencies. You do not have to set up any of these wallets, it all happens on the backend.

You can then deposit funds into these wallets, for most new investors, this will be fiat money deposited via bank transfer or credit cards. From here, you can choose to purchase cryptocurrency with your fiat money, send, receive or convert crypto assets, or convert crypto back to fiat, which you can withdraw to the same bank account or the card you used for the deposit.

Many centralized exchanges offer several different services, such as limit, spot and margin trading, their own crypto debit card, token launchpads or NFT marketplaces etc.

They take a 0.5%-3% commission on deposits and withdrawals and a smaller fee (usually 0.1 to 0.2%) for conversions.

Pros and cons of centralized exchanges

The main benefit of using a centralized crypto exchange is the ease of use. These exchanges are intuitive and have many features that make trading easy. Additionally, they offer fiat support (meaning you can buy cryptocurrencies with real money), and they often list the latest tokens before decentralized exchanges do.

They offer more features, such as margin trading and leverage and the ability to place limit orders. The large centralized exchanges also tend to offer bigger crypto asset diversity.

Centralized exchanges are also supporting multiple blockchains and can act as a bridge between them. For example, if you are holding USDT (a popular stablecoin), you can withdraw it to the network of your choice, such as ETH, BSC, Solana and others. In contrast, many DEXs only operate on one blockchain, and you first have to move your digital assets to that particular blockchain if you want to access it.

Finally, most CEXs use 2-factor authentication for accessing your account, which adds an additional layer of security against theft.

The main drawback of centralized exchanges is the risk of hacking and lack of control. Since users do not hold their own private keys, they leave the exchange in charge of their funds. This means that if anything happens to the crypto exchange, there is nothing you can do to recover your coins.

Additionally, centralized exchanges are subject to regulations by governments, which makes them less attractive for privacy-minded traders. They also have to comply with law enforcement instructions, meaning they can restrict user access or even freeze assets in certain cases. On the other hand, decentralized exchanges are not regulated, so it’s up to users to make sure they are following all applicable laws in their jurisdiction.

Lastly, CEXs tend to be more costly to use compared to decentralized exchanges. If you are an investor who trades a lot, the fees add up and will have an impact on your long-term results.

What is a DEX?

What is a decentralized exchange?

Decentralized Exchanges (DEX) are peer-to-peer exchanges, meaning that orders are matched and traded directly between users instead of relying on an intermediary to facilitate the transactions. This makes it so that users can trade crypto assets without needing to give up custody of their funds. Additionally, users don’t have to provide any personal information, and trading fees are often lower than those of centralized exchanges.

They don’t hold your assets, so you never lose control and custody of your cryptocurrency.

There is no account setup process on a decentralized exchange. You simply connect your wallet, trade your crypto for another digital currency and you are done.

How does a decentralized exchange (DEX) work?

Decentralized exchanges (DEXs) are operating on smart contracts. They are built on the belief that the intermediary charges that take place on traditional centralized exchanges are unnecessary. These DEXs aim to eliminate those intermediaries and provide the best possible trading experience.

A major issue with centralized crypto exchanges is that they charge high transaction fees. This makes it difficult for traders to use the platforms without incurring significant additional costs. On the other hand, decentralized exchanges are able to use smaller trading fees (usually around 0.05%).

DEXs are using an automatic market maker protocol to determine the exchange rate between assets, which does not require any human intervention. This allows users to trade without the need for a third-party or central authority, making it more secure and faster compared to traditional exchanges.

Decentralized crypto exchanges provide liquidity by maintaining liquidity pools. Anyone can participate in a pool and receive a portion of the trading fees as liquidity providers. This system ensures that a much wider user base can benefit and earn by providing liquidity compared to a centralized exchange.

Pros and cons of decentralized exchanges

The main benefit of using a decentralized exchange is that users have full control over their funds. This means that users do not need to trust a third party with their cryptocurrency holdings, which is especially important for those interested in trading large amounts of cryptocurrency.

Additionally, decentralized exchanges are often faster than centralized ones. Since trades are processed on the blockchain, orders can be fulfilled almost instantly. This makes them great for traders looking to capitalize on sudden market movements.

As we already established, decentralized crypto exchanges tend to offer lower transaction fees (there are exceptions to this, for example, if you are trading smaller amounts on the ETH network). Some of the new generation DEXs also let you place limit orders (this was not possible on early version decentralized exchanges).

However, there is still room for improvement when it comes to user experience. Many decentralized exchanges still require users to have some technical knowledge in order to use them, which can be a barrier for non-technical traders. Additionally, they are often not as liquid as centralized exchanges, meaning it might take longer to find the best price when trading certain assets.

DEXs don’t offer fiat currency support (this might change in the future) and tend to offer fewer trading features compared to a centralized exchange.

Which Exchange Type is Better?

There is no clear-cut answer to this question, both centralized and decentralized exchanges have their place in the ecosystem. The decision of which exchange type to use depends on your needs and preferences.

There will be cases where you don’t have a choice. If you want to trade with leverage or want to apply for a debit card that allows you to spend your crypto directly, a centralized exchange is your only option.

On the other hand, if you choose to build a high-risk, high-reward crypto portfolio of small-cap blockchain gaming tokens, many of these will only be listed on a few decentralized exchanges.

Read more about: The Best Decentralized exchanges of 2023

CEXs are more user-friendly and offer advanced features that may be attractive to experienced traders and crypto investors. On the other hand, DEXs provide greater security and privacy for users who want to remain anonymous.

No matter which exchange type you choose, it’s important to do your research and ensure that you are using a reputable platform that is secure and well-regulated. Doing so will help ensure that your funds remain safe when trading cryptocurrencies. 1 

FAQ

Is Binance decentralised or centralised?

Binance 2  is a centralized crypto exchange. It offers a wide variety of options for both investors and crypto traders, including an NFT marketplace and a crypto-based Visa debit card.

Is Coinbase centralised or decentralised?

Coinbase is one of the biggest centralized crypto exchanges. Many institutional investors prefer to do their crypto trades on this platform.

What is the best decentralized exchange?

This can depend on which blockchain you have your digital assets on, but some of the bigger DEXs are Uniswap (ETH and Polygon), Sushiswap (ETH), Pancakeswap (BSC) and Raydium (Solana).

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