The dynamic growth of the cryptocurrency market is accompanied by the emergence of newer and newer cryptocurrency exchanges. Although most of them are centralized, there is no shortage of revolutionary solutions in decentralized exchanges following the DeFi trend. What are they, and how do distributed cryptocurrency exchanges work? What makes them different from the still most popular centralized exchanges? Which type of exchange is the optimal choice for those involved in digital trading currencies? Let’s check!
DEX – decentralized cryptocurrency exchanges
A decentralized exchange or so-called DEX (decentralized exchange) is a platform used to exchange digital assets. Its operation is based on complete decentralization, meaning no central government involvement. This independence allows for free trading of digital assets in peer-to-peer mode, directly between investors. According to experts, decentralization is the key to further developing the cryptocurrency market. The most popular decentralized exchange (DEX) is Uniswap, based on the Ethereum blockchain. There is also interest in exchanges: Sushiswap, Curve and Balancer.
Centralized CEX exchanges
CEX exchanges are currently the most popular and widely used cryptocurrency exchanges. They mimic traditional interactions to a certain extent in their operation – with cryptocurrencies, not shares, being traded on them. Centralized exchanges, as their name suggests, are subject to regulatory oversight. The most popular CEX exchanges are currently Binance, Coinbase and Kraken.
According to their opponents, centralized exchanges contradict the idea of cryptocurrencies, which are decentralized by design and cannot be controlled by institutions.
Characteristics of decentralized DEX exchanges
Decentralized exchanges are free from the custody of government organizations – no third party is involved in the fund’s exchange between users. DEX exchanges also benefit from their advanced privacy safeguards. Every anonymous user has total control over their resources. The independence mentioned above of DEX from regulators is also essential – the fully decentralized ecosystem of exchanges protects them from interference by local and international authorities with users’ funds. This is not the case with CEX exchanges, which must comply with regulatory requirements and perform authentication procedures.
At the same time, DEX exchanges are characterized by ease of use – exchanging cryptocurrencies through them is fast and straightforward. All the necessary operations can be carried out with just a few clicks. The second key advantage is security – in contrast to centralized exchanges, which are more dangerous and emergency, decentralized exchanges guarantee better protection of crypto assets from hacking and theft.
Decentralized exchanges are not without limitations. Key among them are limited volume and lower transaction speeds. DEX exchanges are also more complicated to use, making them more challenging for novice investors. They also have the disadvantage of lacking currency pairs available on CEX exchanges. Unlike centralized exchanges, decentralized ones also lack stop-loss and margin trading features.
CEX exchanges characteristics
The main difference between the DEX and CEX exchanges discussed in this article is third-party participation. Centralized, privately run exchanges are subject to regulatory oversight. They are also required to follow authentication processes – KYC (know-your-customer) and anti-money laundering (AML) procedures.
Additionally, users of centralized exchanges do not have access to their private keys and thus have limited control over resources. They also have to go through time-consuming authentication processes. CEX exchanges also have the disadvantage of less security – information about exchange users is stored in databases, which can be an easy target for hackers. The reliability of the servers of this type of exchange is also lower.
On the other hand, the advantage of CEX exchanges is the higher volume of transactions, accompanied by an increased number of traders. Centralized exchanges are also easier to use, making them ideal for beginners managing their digital currencies. On CEX exchanges, trading pairs are available with fiat money, which means users can buy cryptocurrencies for dollars or euros and make deposits and withdrawals with them.
DEX vs CEX – which is better? Summary
Finally, here is a summary of the critical features of DEX and CEX exchanges. Decentralized and centralized exchanges have been operating side by side for years. Both have their advantages and disadvantages. However, it is worth noting that the decentralized exchanges were gaining prominence to solve CEX exchanges’ problems – third-party participation, low transparency, limited control over funds, unreliable security, and lack of anonymity. Thus, they offer new opportunities for cryptocurrency traders around the world.