Fundamental Differences
Decentralized exchanges or DEX, such as PancakeSwap or Uniswap , are autonomous financial protocols based on smart contracts that allow cryptotraders to convert one digital asset into another, with all transactions displayed in a blockchain.
Decentralized exchanges allow people to exchange cryptocurrency directly with each other without intermediaries in the form of cryptocurrency exchange companies.
Example DEX: Uniswap, PancakeSwap, SpookySwap
Centralized exchanges or CEXs, such as Binance, are online trading platforms that mediate between users, they match buyers and sellers through an order book. They essentially work much like online brokerage accounts, which is why they are so popular with investors.
CEX example: Binace, OKX, Bybit
Pros and cons of DEX
DEX has some advantages over centralized crypto exchanges and some disadvantages:
Pros:
1. Privacy and anonymity
Using a decentralized exchange usually only requires connecting a wallet and signing a transaction. No identity verification is required.
2. Security
Decentralized exchanges are usually more secure than centralized exchanges for two reasons:
- They are not storage-related: hackers are interested in exchanges with a central database in order to extract users' private keys and withdraw their funds. Because DEX doesn't store your private keys, hackers can't break into your wallet.
- No identity checks: no risk of leakage of user's personal data.
3. DeFi and NFT integration
DeFi and NFT are the two boundaries of the blockchain space, and DEX are strong movers. DEX allows users to access a world of smart contracts and DApps that provide financial services, including credit and savings products, as well as NFT projects.
Cons:
1. Limited trading
DEX's functionality is currently limited. Features such as margin trades, limit orders, futures, options, etc. are generally not available.
2. Efficiency
Decentralized exchanges are not as fast and efficient as CEX because of the scalability issues that most blockchains face. Centralized exchanges don't face this problem because they use both in-network and out-of-network mechanisms to keep things running smoothly.
The main disadvantage for some is that you need to understand the mechanics of DEX interaction and be responsible for your own security.
Pros and cons of CEX
CEX also has several advantages and disadvantages over decentralized exchanges:
Pros:
1. Trading volumes
Centralized exchanges are usually very liquid. Binance, for example, regularly records daily trading volumes of over $30 billion. For newcomers, these active platforms essentially guarantee a seamless exchange of their assets at any time. For experienced traders, CEXs provide a way to transfer relatively large amounts of funds in and out in a matter of minutes.
2. Fiat/crypto and crypto/fiat currency conversion
Centralized exchanges usually support the inclusion and exclusion of fiat cryptocurrency. This means that they allow you to buy bitcoins, for example, for U.S. dollars or any other national currency.
3. More options
In addition to the huge number of digital assets supported by CEX, they offer many more features beyond exchanging one asset for another, such as: margin trading, cryptocurrency derivatives trading, exchange betting and margin lending, among others.
4. Ease of use
One of the attractive qualities of most CEX is the user interface. Given that most newcomers are not familiar with cryptocurrencies or simple terms, CEX does an excellent job of guiding users through the crypto space. Some CEX platforms, such as Binance, have lightweight versions for users who want to make basic transactions. Moreover, they function much like online brokers, thereby acting as a familiar face to traditional investors.
Cons:
While centralized trading platforms have many advantages for investors who are used to their online brokerage accounts, they have a number of significant drawbacks.
1. Strict "Know Your Customer" (KYC) policy
For users who want to maintain privacy while trading, CEX is not the right exchange. Centralized exchanges are subject to strict KYC policies. They usually require you to upload a photo of your face and a valid ID in order to buy and sell cryptocurrency or withdraw funds.
2. Not your keys - not your coins
While CEXs provide easy trading, high liquidity, etc., they provide you with wallets, which means they have power over your cryptocurrency. A crypto wallet should not be controlled by a third party. Using the famous phrase "not your keys, not your coin," it's safe to say that CEX wallets pose a security risk to traders and investors.
3. Hacking
In recent years, we have witnessed several infamous hacks of cryptocurrency exchanges, where they lost billions of dollars. Because exchanges centralize user funds, they are prime targets for cybercriminals looking to get their hands on cryptocurrency.
CEX vs. DEX: Summary of Comparison
Both types of crypto exchanges allow users to buy and sell cryptocurrency with differences in key elements such as liquidity, security and usability.
For newcomers looking to join the cryptocurrency space, CEX provides an easy and quick way to trade. DEX, on the other hand, is more suitable for experienced traders who need privacy and full control over their digital funds.
That's all for today, the material was not enough, now we can have a well-deserved rest;)
Good luck to you friends, and may fortune bless you!
