In crypto, the buying, selling, or swapping of crypto coins and tokens often takes place in Centralized or Decentralized Exchanges. Each of them represents a specific world inside the crypto space which enables users to manage their assets as they see fit.
Whether to use a Centralized Exchange (CEX) or a Decentralized Exchange (DEX) is completely up to you, but just to make your decision a little bit easier, we have prepared an overview of their advantages and limitations. Let’s dig in.
Centralized Exchanges or CEXs
The so-called first-generation exchanges created the first marketplaces where cryptocurrency investors could buy, sell or swap their crypto assets. As their name suggests, these exchanges are centralized which means they have a central entity that controls the entire platform, user’s information, and assets.
CEXs manage trading through the orderbook model, a list of open buy and sell orders, consisting of volumes and prices, just like traditional exchanges. All orders get recorded and validated. All transactions are processed within the exchange’s database. On-chain transactions happen only when a user requests a transfer from or to an external address. This means that CEX transactions are mainly processed off-chain.
These exchanges offer a limited offer of crypto coins and tokens. In order to list a new one, it must be fully audited, inspected and reviewed. All listed cryptocurrencies need to fulfill security protocols and comply with required legal standards.
Individuals who want to use their services must pass KYC (Know your customer) and AML (Anti-money laundering) requirements, which means that they need to submit all required personal information that gets processed and stored on the platform’s servers. Their funds are stored in custodial crypto wallets inside the respective CEX.
CEXs offer easy-to-use trading services and numerous advanced features, like margin, features and OTC trading. At the moment, users seem to prefer the centralized world of crypto exchanges due to its user-friendly stance and continuous access to support. CEXs also provide better liquidity, because they service a wider client base. They therefore benefit from a constant flow of supply and demand and offer a higher trading volume.
According to CoinMarketCap, the top 5 Central Exchanges are Binance, FTX, Coinbase, Kraken and Gate.io.
Decentralized exchanges or DEXs
The marketplace that truly embodies the very nature of crypto space are the new generation of exchanges - Decentralized Exchanges or DEXs.
In comparison to CEXs, DEXs process transactions by enacting smart contracts, peer-to-peer or via a liquidity provider. Transactions have lower fees than the ones on CEX. Decentralized exchanges only support crypto to crypto swaps, and do not include fiat.
Users can choose between a long list of trading pairs, because available coins and tokens do not need to go through examination. They only need to be built on one of the supported chains, that’s it.
These exchanges don’t have any direct control over users’ funds, require no KYC or AML steps and store no user information. Everything is practically anonymous. Users interact with DEXs by connecting their non-custodial wallets, e.g. Metamask, TrustWallet, MyEtherWallet to name a few. All transactions are on blockchain which makes DEX services fully transparent.
Even though DEXs represent the very foundation of crypto space, they don’t attract as many users as CEXs. Hence, they offer lower trading volumes, lower liquidity and higher price volatility.
Decentralized exchanges come in different forms, i.e. order book DEXs, DEX aggregators, and - the most popular one - Automated Market Maker. The latter operates through smart contracts and liquidity pools. Currently, the top 5 CoinMarketCap DEXs are Uniswap, PancakeSwap, DODO, Kine Protocol, and dYdX.
Is the future of crypto exchanges centralized or decentralized?
According to a KPMG 2021 report, exchanges represent the most valuable businesses in the crypto world. CEXs are still far more common than decentralized exchanges (DEXs) and account for around 95% of all exchange crypto trading. Binance, the largest crypto exchange in the world, processes a $14 billion spot trading volume per 24 hours, in comparison to Uniswap, the best known DEX, with a 24h trading volume of $246 million.
For now, decentralized exchanges are still considered new and a bit complicated, but embody the true nature of crypto space. CEXs, on the other hand, hold the majority of the crypto market cap by offering users a straightforward crypto solution, similar to the traditional financial marketplace. As time passes there are fewer differences between the two - except for the crucial one - the idea of decentralization.
And you? Are you more into CEXs or DEXs?
Join the GoCrypto community on Telegram!