Cryptocurrency: Understanding the differences between CEX and DEX
Cryptocurrency is an emerging market that has gained much popularity in the past few months. Though the market is very volatile and tough to predict, it keeps getting famous among the general populace.
In the last four months, many cryptocurrencies have broken and set new All-Time-Highs where the total capitalization of the cryptocurrency market reached an all-time high of 2 Trillion dollars.
As new trends begin to enter the crypto space, the whole market also keeps shifting, and individuals who are quick to align themselves with these trends will survive or make it out big in this market.
Now that we have established that new trends come into the crypto space just as soon as a new technology emerges. One of the trends in this space over the last few months is the increase in the popularity of Decentralized Exchanges for crypto trading.
Firstly, let’s talk about what Cryptocurrency Exchanges, either CEX or DEX, stand for before discussing their differences.
What are Cryptocurrency Exchanges?
Cryptocurrency exchanges are trading platforms where crypto traders and investors can buy, sell, or monitor their digital assets. As it stands, the simple act of buying and selling are the two activities that are common to all exchanges. However, for a trader to monitor their coins on an exchange, the exchange has to have an integrated wallet.
Understanding the differences between CEX & DEX
Now that we have established that CEX and DEX are both exchanges that support the buying and selling of coins, it is imperative to talk about their differences. The two types of crypto exchanges have been in existence for a while, although it's only the centralized exchanges that have been more popular in the crypto space until recently.
Centralized Exchanges: What makes them unique?
Centralized exchanges are top-rated. At the mention of only a few of them, such as Binance, Kucoin, Bitmax (now AscendEx), and Coinbase, many people in the crypto space will surely be able to relate.
The unique feature of centralized exchanges is that they have their order book in which every order is recorded and validated to ensure correctness through internal data exchanged. CEX is known to use dedicated servers that pass through centralized security processes.
Also, centralized exchanges are known to operate under thorough supervision. They mostly subject users to an extensive Know-Your-Customer (KYC) process, which is a significant part of their in-house policies. In general, CEX is run centrally by a strongly supervised company that offers excellent customer support to its users to boost their popularity.
Advantages of CEX
Fast transactions in real-time
Availability of deposits and withdrawals in fiats
Abundant trading options
Trading options are seamless to operate
Disadvantages of CEX
CEX wallets are beyond the user's control
They are primarily under the control of regulators, third parties and legal regulations.
The central server can be attacked
Requires extensive KYC from users
Decentralized Exchanges: What makes them unique?
Decentralized exchanges entered the crypto space right after CEX. But it has quickly gained popularity due to the rise of Decentralized Finance (Defi).
DEX also allows the buying and selling of cryptocurrencies; however, both terms are referred to as "swap". Therefore, crypto traders and investors willing to buy and sell a coin on DEX will have to swap one coin for another.
Decentralized exchanges feature an automated market maker (a type of order book) with a trading venue, a matching system, and security layouts.
However, unlike the centralized exchanges, all these functions in DEX are fully decentralized.
Hence, DEX is not built on internal servers or in-built IT infrastructure. They run on decentralized applications (dApp) on a blockchain such as Ethereum, Binance and others.
Some of the most popular DEX exchanges include Uniswap, Shushiswap, Pancakeswap, 1Inch and several others.
Advantages of DEX
Free from government regulations & monitoring
Users are entirely in charge of their private keys and assets
No KYC requirements
No central server can be attacked
Disadvantages of DEX
Transactions are slower on DEX
Gas fees are incredibly high
Fewer trading functionalities compared with CEX
Liquidity is slower