Exchanges on the crypto market fall under centralized exchanges (CEX) and decentralized exchanges (DEX).
We compare and contrast the two and the hazards you should be aware of when trading on either of these platforms.
CEX, an overview
The primary idea behind CEX is that a single firm is in charge of its activities and transactions. Following the debut of Bitcoin in 2010, platforms such as Binance, Kraken, Kucoin, Coinbase, and FTX arose, acting as mediators in trades and stewards of user funds. Some are governed by a single regulator, while others are managed differently. We may say that the human aspect is at the heart of CEX.
Read more: What is a CEX?
DEX, an overview
DEXs are blockchain-based programs that promote large-scale crypto asset trading among multiple users. It’s a peer-to-peer marketplace where crypto dealers trade directly with each other. DEXs enable one of crypto’s most essential features: facilitating financial transactions that aren’t mediated by banks, brokers, or other third parties.
Read more: What is a DEX?
What are their main differences?
The former controls your funds between centralized and decentralized exchanges, while the latter allows you to interact with the market and keep complete control over your funds.
A centralized exchange (CEX), such as Binance, matches buyers and sellers by using an order book. Investors like them because they’re similar to online brokerage accounts.
The decentralized exchanges (DEX), such as PancakeSwap and Uniswap, give crypto traders the ability to exchange one digital asset for another while all transactions remain visible on the blockchain.
But fund security is not the only difference between the two.
CEX: Pros and Cons
Pros:
● Volumes of transactions: Centralized exchanges have good liquidity. Binance, for example, is $30 billion. For newcomers, these active platforms make it easy to exchange assets. Using CEX, skilled traders can transfer substantial amounts of money in minutes.
● Currency Conversions (Fiat/Crypto and Crypto/Fiat): On and off-ramps from fiat to crypto are common on centralized exchanges, which means you can buy bitcoins using US dollars.
● Additional Features: Apart from the wide range of digital assets that CEXs support, they also offer various other services such as margin trading, crypto derivatives trading, exchange staking, and margin lending.
● User-Friendliness: The user interface is one of the most appealing features of most CEXs. CEXs excel at funneling customers into the crypto market, given that most newcomers are unfamiliar with crypto pairs or basic concepts like ‘going long or short.’ Specific CEX platforms, such as Binance, provide lite versions for consumers wishing to make basic trades. Furthermore, they operate similarly to internet brokers, giving traditional investors a familiar face.
Cons:
● Strict KYC Policies: A CEX is not the exchange to use if you want to keep your trade private. Users of centralized exchanges must comply with tight KYC standards. To purchase and trade bitcoin or make withdrawals, they usually need you to provide a photo of your face and a valid identity card.
● Oops! Forget your coins: Considering the famous phrase “not your keys, not your coins,” there is no doubt that CEX wallets pose a security risk for investors and traders. Their wallets are custodial, meaning they control your cryptocurrency. The ideal wallet is non-custodial.
● #Hacked: We have seen several notable crypto exchange hacks over the years, with exchanges losing billions of dollars. The fact that stock exchanges hold user funds makes them prime targets for cybercriminals looking to gain access to cryptocurrency.
DEX: Pros and Cons
Pros:
● Anonymity and Privacy: Connecting your wallet and signing a transaction is usually all that is required to use a decentralized exchange. There is no need to verify your identity.
● Security: For two reasons, decentralized exchanges are often more secure than centralized exchanges:
○ They are non-custodial: Hackers target exchanges to gain access to the central database and steal users’ private keys, allowing them to withdraw their assets. Hackers cannot access your wallet since DEXs do not store your private keys.
○ There are no identity checks: There is no chance of private user data being leaked.
● Integration of DeFi and NFTs: DeFi and NFTs are the two blockchain frontiers, and DEXs are potent propellers. DEXs give customers access to the world of smart contracts and DApps that offer financial services such as lending and savings.
Cons:
● Trading is restricted: The functionality of DEXs is currently limited. Margin trades, limit orders, futures, options, and other frequently unavailable features.
● Efficiency: Due to the scalability challenges that most blockchains suffer, decentralized exchanges are slower and less efficient than CEXs. Because they use both on-chain and off-chain procedures to maintain smooth operation, centralized exchanges are not affected by this problem.
So which is better?
Users can buy and sell cryptocurrency on both types of crypto exchanges, but there are differences in essential aspects such as liquidity, security, and usability. It should be noted that there are various elements to consider while determining which is the most effective.
First, you must choose which assets to trade and which investment possibilities to pursue.
- Are they listed on CEX? If not, they’ll almost certainly be found on DEX.
- Is anonymity more critical than anything else? If you answered yes, DEX outperforms the competition by keeping your activities confidential.
- Your recent experience is quite essential. DEX is a viable marketplace if you have experience with crypto trading and do not require custodians. CEX, on the other hand, is preferable for beginners who find it challenging to sort through interfaces, buying or selling operations, and so on.
(written by Catherine S Thomas)
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