So, you’re new to the crypto space and you’ve heard about decentralized (DEX) and centralized exchanges (CEX). What on earth is the difference and are there any risks involved? Let’s dive in!
What is a crypto exchange?
A cryptocurrency exchange is an intermediary that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money. Just like stock exchanges allow people to buy and sell shares and derivatives, cryptocurrency exchanges are a marketplace where people get to buy and sell blockchain-based coins and tokens. But how your transaction is processed depends on the type of exchange you’re using.
Centralized Exchanges (CEX)
Centralized exchanges are exchanges created by centralized organizations which exert control over the exchange. The centralized organization serves as the intermediary between buyers and sellers. Some of the common examples of centralized exchanges include Coinbase, Gemini, and Binance.
Due to the high trading volume, a CEX can have high liquidity. The bustling activity on the centralized trading venues ensures many buy and sell orders to guarantee market-friendly trading. These exchanges typically allow you to buy crypto with fiat currencies eg – US dollars. They offer a lot more features, such as margin trading, crypto staking, and margin lending. To start trading, you must first place your assets in the custody of the specific exchange.
Although centralized trading platforms offer many benefits, they come with a handful of drawbacks.
While they provide easy trading and high liquidity, their wallets are custodial, meaning that they hold authority over your crypto. Going by the famous phrase “not your keys, not your coin,” it is safe to say CEX wallets create a security risk for traders and investors. Why? Because if anything were to happen to the CEX, you may lose custody of your funds.
Decentralized Exchanges (DEX)
A decentralized exchange is a peer-to-peer marketplace where transactions occur directly between crypto traders. They are free from the control of any single entity and are actually smart contracts tailored for offering peer-to-peer transactions. Unlike a centralized exchange, a DEX doesn’t allow for exchanges between fiat and crypto. Instead, they exclusively trade crypto tokens for other cryptocurrency tokens. Some examples of a DEX include – pancakeswap & sushiswap.
A decentralized exchange is free from government regulations and monitoring. Since a DEX does not exist as a central entity, there is no platform to put funds into. Instead, you simply connect the DEX to your existing wallet, using your own private keys to manage your funds. Anonymity is another major advantage of a DEX platform. There is no authentication procedure, no KYC, and no personal documents uploaded to servers. Since the selection of coins and tokens on a DEX is not limited, users are free to invest in a wide range of projects.
However, unlike a CEX, a DEX tends to be less user-friendly. The interface can be harder to navigate and understand, especially when you’re new to the crypto space. Additionally, they do not accept payment in fiat currencies, eg – US dollar. Liquidity is a big issue for decentralized exchanges. The relatively newer concept of decentralized exchanges means that there are significantly fewer traders than on CEX.
What’s the best exchange for me?
Both types of crypto exchanges allow users to buy and sell crypto, with disparities in key elements such as liquidity, security, and usability. For beginners looking to join the crypto space, a CEX provides a simple and fast way to trade. A DEX, on the other hand, is more suited to experienced traders looking for privacy and complete control over their digital funds.
The beauty of crypto is that it’s constantly evolving. With a little learning, you can take full advantage of what the industry has to offer – not just for your wallet, but