Currently, the market offers more than 400 crypto exchanges to exchange virtual currency. These exchanges are divided into 2 types: decentralized (DEX) and centralized (CEX). And between them, there is a confrontation for leadership — each party is trying to attract as much crypto business as possible to its side. Below we will try to understand each of them in more detail.
General concepts and the principle of operation of exchanges
Centralized exchanges are considered a relic of the past, although today, they still have a multimillion-dollar customer base. Decentralized crypto exchanges are a new era in the crypto business, the structure of which is more suitable for this business. They are more user-friendly and keep control of your private keys.
Let’s give definitions.
CEX exchange (such as Binance, FTX, and Kraken) is a crypto platform that matches buyers with sellers through a catalog of orders. Their work is similar to that of brokerage accounts, which is why they are so in demand among investors. One organization manages them as an intermediary between the two parties. All crypto transactions made on the exchange are not executed in the blockchain but in the database, and the user does not have keys to the vaults. That is, you cannot own the available crypto assets on the exchange because the exchange itself acts as a vault on your behalf.
DEX exchanges (Uniswap, Pancake Swap, etc.) are autonomous crypto platforms that operate on smart contracts between users, allowing traders to convert digital assets of one type to another, and all crypto transactions are presented in the blockchain, that is, distributed technology is used. Such exchanges do not have an intermediary, their assets are not held, and crypto transactions are recorded in the blockchain.
Thus, their main difference is that the centralized exchange exercises control over your finances when you work on a crypto site. At the same time, on the decentralized, users retain control over finances during trading.
But the security of vaults is not the only difference between these exchanges.
More detailed comparison
Trading virtual currency is always associated with certain risks, regardless of the type of exchange. But the degree of risk of these exchanges is different. Below we will take a closer look at each of the exchanges’ characteristics and what risks they entail.
These platforms are similar to the traditional stock market, but the trade is in cryptocurrencies, not securities.
And here are the essential characteristics of centralized:
- There is a clear threat to such exchange from hackers hacking the funds stored on their servers. It has already happened more than once, and it will probably happen more than once, especially for exchanges with a small turnover.
- There are rules on centralized exchanges that can change instantly, which creates a considerable risk for your finances in your vault. For example, if a crypto exchange is now under the control of an investigation, your finances may be frozen, or you may be arrested for some time.
- Often, this type will require you to verify your identity. And in the event of information leakage, your data can be sold to the side for criminal purposes. In this case, you are a potential target for hackers.
On a centralized platform, all crypto transactions are processed by servers, but user accounts and vaults are entirely under the control of the exchange.
So, what will users be able to do on such an exchange:
- create an account and store cryptocurrencies in the storage of the exchange;
- carry out transactions using virtual currency, which is processed on the server of this exchange;
- engage in trading and futures contracts, margin trading, etc.
On such exchanges, verification from all users is required. Regulation is carried out centrally — all operations for cryptocurrency exchange, the safety of funds, and maintenance are under the control of the exchange.
No data processing servers on DEX exchanges exist, and no centralized management exists.
But there are still main characteristics of this exchange:
- Only you have the right to control your finances on the exchange. But if you lose the key to restoring your vault, you will lose your cryptocurrency. Therefore, the safety of this key is critical.
- They are created using smart contracts, and because of this, there is a risk associated with the code. And this means that if there are errors or weaknesses in the encoding of the crypto platform, hackers will be able to take advantage of this, and you will lose your money. It has already happened. It is better to use the leading exchanges to minimize the risks.
The management model that uses a distributed registry eliminates the ability to manage the user’s storage. On these exchanges, crypto transactions are carried out without a brokerage firm but between two users (organizations).
By cooperating with such exchanges, you get such services:
- vault and account are only under the control of the user, and although you create a wallet on the exchange, it will still belong only to the user and cannot be blocked or functionally limited;
- all transactions are based on a smart contract that is processed on the blockchain — once an order has been created and a response has been received from another user, it is technically impossible to cancel this operation;
- the exchange does not act as an intermediary;
- verification is not required, and you can remain completely anonymous.
And another significant difference between the two types is the absence of a brokerage firm when making transactions.
And besides, exchanges have a different technical model: decentralized blockchains and smart contracts that allow you to exchange, while centralized ones are just classic broker sites.
Advantages and disadvantages of both types
Let’s summarize and present each type of exchange’s positive and negative aspects in a table.
Only the user has access to their crypto assets and the key, while the exchange does not.
Fiat transactions are not supported; they only work with cryptocurrency.
The presence of operations with both cryptocurrency and fiat funds.
There is no access to private keys.
Anonymity during the exchange and the absence of a brokerage firm.
A little degree of liquidity.
The high degree of liquidity.
Identification is required, which means privacy is impossible.
The data is hosted on the server, so hacking the account and stealing the storage will not work.
Lots of trading options.
A high degree of risk for hacking.
It is possible to block the account and storage.
The government or the regulator cannot close it.
The exchange may stop working at any time.
The management of the exchange sets prices for crypto assets.
Thus, you need to know the significant differences between these types of exchanges to decide which one suits you best.
And on the one hand, the other, you can buy and sell virtual currency, but with a difference in critical functions — ease of use, the safety of funds, confidentiality, and the range of operations provided.
There are many CEXs, but we regularly see reports of new DEXs being developed. For example, the planetex.io project wants to implement a vast ecosystem in one place, including a decentralized cryptocurrency exchange and a P2E game, an NFT collection, a social network, and much more. The sale of NFTs has already been launched, and it is planned to invest the proceeds for the project’s further development.
Which exchange do I prefer?
Everything will depend on your goals and priorities. If fiat transactions are important to you and liquidity is essential, then it is better to choose centralized. And if privacy, personal access to your vault, and the safety of your funds are a priority, then decentralized.
The main thing is that when you decide on your goals, the choice will become evident.
Since the centralized exchange is considered an old-timer, this exchange is more convenient and easier for beginners and inexperienced users. In contrast, the decentralized exchange is more suitable for experienced traders.
Of course, at the moment, a decentralized exchange has more pros, but on the other hand, everything is relative, and your choice will depend only on the solution to the tasks set. And if CEX is more suitable for this, then do not compare the advantages and disadvantages of these exchanges only by quantity. Choose only the toolkit that suits you best.
It is also noteworthy that, at present, there are already hybrid exchanges that combine the characteristics of both types. But this type of exchange has yet to become widespread, and their technology and structure are under development.