Cryptocurrency exchanges are websites run by companies or organizations where you can easily buy and sell cryptocurrency.
When cryptocurrency first appeared, you had to type commands in a terminal to send coins to someone. Later, user-friendly interfaces were created to simplify access to cryptocurrency.
What are cryptocurrency exchanges today?
Today, cryptocurrency exchanges are online platforms where users can buy, sell, or swap cryptocurrencies.
There are many types of cryptocurrency exchanges, but normally, most classify them into centralized and decentralized exchanges. The main difference between CEX and DEX is the way now users manage their funds. In a CEX, all users’ crypto is stored in a wallet of the exchange. In a DEX, users have their funds in their wallets.
Why do we need cryptocurrency exchanges?
Cryptocurrency exchanges work like brokers. They let you trade, buy, and sell cryptocurrencies like Bitcoin, Ethereum, and Tether.
What Is a Centralized Exchange?
A centralized exchange is a platform where users can perform their operations with crypto or fiat money. The most popular examples of centralized exchanges are Binance, Coinbase, Kraken, and AddUp. Centralized exchanges hold user funds in custody. It means that users’ money is stored in the exchange’s wallet.
How does a centralized exchange work?
A centralized exchange enables users to buy, sell, and trade cryptocurrencies. Normally, a centralized exchange has its own liquidity pools, and all swaps are performed with the platform’s liquidity. This is why centralized exchanges may have lower fees than decentralized exchanges, and the processing speed there is much faster.
Advantages of centralized exchanges
- Easy-to-use interface
- Own liquidity, which means lower fees and faster transaction processing speed
- Centralized exchanges allow buying and selling crypto with fiat
- If a user forgets access data to his account, it can be recovered
- Customer support.
Disadvantages of CEX
- Users have no custody of their funds, their money is stored in a wallet of the exchange
- Centralized exchanges store the funds of their users which is why they are an attractive target for hackers.
Risks of storing funds on centralized exchanges
Centralized exchanges implement security mechanisms to protect users' funds, and still, keeping money there is risky. These platforms store crypto in the equivalent of millions of dollars, this is why they become often a target for hackers.
Another risk is connected with the custody of funds. Users’ coins are stored in the exchange’s wallet, and when the platform decides so, it can block the funds or even confiscate them.
What Is a Decentralized Exchange
A decentralized exchange allows users to trade crypto without an intermediary. Users have their funds in their wallets and are the only ones responsible for their safety.
How does a decentralized exchange work?
The way of how a DEX operates differs from the way a CEX works. A DEX uses smart contracts to perform transactions directly on a blockchain. So, smart contracts in DEX enable all the swaps.
The most popular examples of decentralized exchanges are Uniswap, SushiSwap, and PankaceSwap.
Advantages of DEX
- Users do not need to register an account or send their coins to a DEX to use it. This is why the security level of decentralized exchanges is very high.
- If the blockchain is not busy, transaction fees are low.
Disadvantages of decentralized exchanges
- Decentralized exchanges often have lower liquidity than centralized exchanges.
- DEXes are not for beginners. Users need to have some technical knowledge to use them.
- Decentralized exchanges are not controlled by a central authority this is why there is no customer support that can help recover funds.
- DEXes support for fiat currencies is very limited.
Centralized vs Decentralized Exchanges: Differences Between CEX and DEX
You should consider many details when comparing a CEX with a DEX. The most important details are the following.
If you make a comparison of CEX and DEX security, you will see that centralized exchanges are often hacked. It is so because these platforms store all the money of their users. Decentralized exchanges do not store the coins of their users, and this is why they are more secure.
When you are choosing a platform, check the ease of use of exchanges. Centralized exchanges have user-friendly interfaces, which is why they are suitable for beginners. Decentralized exchanges are not so easy to use, users need to have some technical knowledge to use them. This is why they are good for experienced users.
Transaction speed on CEX and DEX is also different. Centralized exchanges swap all coins directly on the platform, they do not use a blockchain. This is why transaction speed is much faster. Decentralized exchanges use smart contracts to perform all swaps on a blockchain. This is why transaction speed may be slow if a blockchain is busy.
How to Choose a Cryptocurrency Exchange
When you are choosing between a centralized or decentralized exchange, you need to check many details.
Centralized exchanges have user-friendly interfaces. This is why if you want to find the best exchange for beginners, choose a CEX. CEXes also offer a lot of trading pairs and support fiat currencies. So, if you are choosing an exchange for experienced traders, you may also pick a centralized exchange.
But if you prefer to stay anonymous, then choose a DEX. If your main criteria for choosing an exchange for trading is the control over your coins, also choose a DEX.
The Future Development of Cryptocurrency Exchanges
The future of centralized exchanges is promising. Lately, many countries started developing a regulatory framework to oversee the crypto market. With it, the trends in cryptocurrency exchanges may shift, and DEXes may start growing in popularity.
On the other hand, when you compare the regulation of CES and DEX, you will see that DEXes are not regulated. This makes the future of decentralized exchanges rather obscure.