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What's the difference between CEX and DEX?

  1. CEX (Centralized Exchanges)
  2. Advantages of CEX
  3. 1. High trading volume and high liquidity
  4. 2. Fiat-cryptocurrency trading and vice versa
  5. 3. High level of functionality
  6. 4. User friendly
  7. 5. Fast transaction
  8. Disadvantages of CEX
  9. 1. Possible of hacking compared to DEX
  10. 2. Under government regulation
  11. DEX (Decentralized Exchanges)
  12. Advantages of DEX
  13. 1. High security from hacking
  14. 2. Low-cost fee
  15. 3. No fraud from any third party
  16. 4. DeFi and NFT Integration
  17. 5. Provide a variety of tokens
  18. 6. Cannot be closed by the government
  19. Disadvantages of DEX
  20. 1. Low liquidity compared to CEX
  21. 2. Limited functionality
  22. Conclusion

There are a lot of things that we need to know before we start our crypto journey and one of them is crypto exchange. Thanks to crypto exchanges, it brings cryptocurrencies to the current success and mass adoption. There are now two types of crypto exchanges: CEX (centralized exchanges) and DEX (decentralized exchanges). Both of them are fundamentally different and have their advantages and disadvantages. The difference between these two exchange platforms lies in the approach used.

CEX (Centralized Exchanges)

Centralized Exchanges is a trading crypto platform that works as a meeting place for people to exchange their cryptocurrency. CEX is built by a centralized organization company acting as a third person to store assets, regulate exchanges, and charge exchange fees.

In CEX, the exchange process happened via order book. It sets up the price for a specific cryptocurrency based on current buy and sells orders.

This type of crypto exchange is currently the most popular in the world and is typically used by crypto newcomers, as CEX is a user-friendly platform that makes purchasing and managing digital currencies extremely simple. Binance, Bitmax, Bitfinex, CEX.io, Kraken, and OKEx are examples of CEX.

Advantages of CEX

1. High trading volume and high liquidity

As CEX is famous and used by a lot of active users who buy/sell their assets, it results in high trading volume compared to DEX. High trading volume effect on high liquidity as well. Liquidity means the ability of an asset to be converted into cash or other cryptocurrencies. Liquidity is important for many reasons because it makes a crypto exchange less vulnerable to market manipulation.

2. Fiat-cryptocurrency trading and vice versa

Centralized exchanges support fiat to crypto on and off-ramps, this makes people start their crypto journey easier as they can just exchange their fiat money for cryptocurrency.

3. High level of functionality

CEX works not only as a crypto trading platform but also provides other functions or features, such as margin trading, crypto derivatives trading, exchange staking, and margin lending.

4. User friendly

CEX's user interfaces are easy to understand even for crypto newbies and the processes and procedures can be internalized quickly. CEX also provides easy and uncomplicated access to the respective trading options.

5. Fast transaction

CEXs can$217 billion transactions are flowing process every transaction fast and almost in real-time, helping traders to react directly without waiting if the market is changing. This happened because CEX is handled by a centralized organization company that can process thousands of orders per second.

Disadvantages of CEX

1. Possible of hacking compared to DEX

CEX mechanism is trust-based, as CEX store their user crypto asset and have integrated wallets that are part of their system (custodial services). This mechanism is beyond the user’s control. Therefore, users have to give full trust to exchanges that their money is safe. This condition also makes CEX a prime target for cybercriminals.

2. Under government regulation

As centralized exchanges are under the control of regulators, third-party providers, and legal regulations. So, to prevent exchanges from money laundering, operators are required to collect extensive data about their customers (KYC). This regularity is contrary to the basic idea of cryptocurrencies.

DEX (Decentralized Exchanges)

DEX is the next step in the evolution of CEX. The system is not controlled by a centralized entity; instead, every trade or transaction in DEX is governed by an automated procedure that is conducted by a smart contract. When compared to CEX, the availability of smart contacts makes transactions more instant and low-cost.

In contrast with CEX which uses the custodial framework, DEX uses the non-custodial framework, which means every user has full control of their private keys when transacting through DEX, this mechanism gives users a true sense of ownership of their assets as they have full control over their digital assets. Examples of DEX are Dex (TRON), Newdex (EOS and TRON), Switcheo Network (Ethereum, NEO, and EOS), Uniswap, Sushiswap, Compound, and Curve Finance.

Even before the increasing popularity of Decentralized Finance (DeFi) products, DEX has already gained popularity since the rush of the decentralized exchange Uniswap which raised the pros and cons of DEX and CEX. Thus, makes crypto enthusiasts believe that DEX's market share will increase in the future.

Based on Coinbase's data, in the first quarter of 2021, there are $217 billion transactions flowing through decentralized exchanges. As of April 2021, there were more than two million DeFi traders, a ten-fold increase from May 2020.

Advantages of DEX

1. High security from hacking

There are two reasons that make DEXs more secure than CEXs. First, DEXs use the non-custodial framework, where users have full control over their assets, so hackers cannot get into user wallets unless they expose them by themselves. Hackers mainly targeted the central database of exchanges to extract users’ private keys and withdraw their funds. Second, because no identity verification process is required, there will be no risk of leaking private user data.

2. Low-cost fee

A large number of trading pairs take place through the DEXs network, making the trading fee at DEXs low.

3. No fraud from any third party

There will be no fraud since there are no centralized organizations or third parties that act as financial regulators or authorities who monitor or impose regulations on the exchange as a decentralized application.

4. DeFi and NFT Integration

DEXs use a smart contract that allows the users to access smart contracts' world and DApps that provide financial services, including lending and savings products, as well as NFT projects.

5. Provide a variety of tokens

Anyone can mint an Ethereum-based token and create a liquidity pool for it. This activity makes DEXs provide a variety of tokens.

6. Cannot be closed by the government

Without the presence of third parties including the government, DEXs is free from government requirements, regulations, or monitoring and can not be closed by the government.

Disadvantages of DEX

1. Low liquidity compared to CEX

DEX is still relatively a new concept and there are fewer traders compared to CEX therefore DEX liquidity is lower. Nevertheless, with the growth of DeFi, asset liquidity on DEX has increased rapidly.

2. Limited functionality

The graphical user interfaces on DEX are still too complicated, especially for beginners. Functions such as limit orders, margin trades, or stop losses are not available for many traders. Nonetheless, most DEX tries to adapt the functionalities known from CEX, so in the future, DEX will be more user-friendly.

Conclusion

CEXs and DEXs both have advantages and disadvantages. CEXs have significant trading volume and liquidity as a result of active users who purchase and sell their assets; they also allow users to trade from fiat to crypto and vice versa; and they have a high level of functionality, user-friendliness, and a quick transaction procedure. However, because CEXs are managed by a central body, they are vulnerable to hacking. This contradicts the fundamental concept of cryptocurrencies. Meanwhile, DEXs are safer from third-party hacking and fraud because there is no centralized body that oversees them, has cheap fees, and is connected with two blockchain frontiers, DeFi and NFT. Furthermore, DEXs offer a wide range of tokens. Crypto investors can determine which one is best for them based on this comparison.

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Published on August 26, 2021

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