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Decentralized Exchange vs Centralized Exchange - Key differences

14 June, 2022 Blockchain
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Since 2017, Blockchain and Crypto Currency has witnessed a skyrocketing in popularity, which resulted in numerous trading platforms’ emergence. Until now, there is a total of 305 of both decentralized exchange (DEX) vs centralized exchange (CEX) in CoinMarketCap. In spite of CEX’s supremacy, DEX is gaining more and more adoption. So let’s deep dive into the pros and cons of decentralized exchange vs centralized exchange and find out which platform is more preferred. 

I. Definition of Decentralized Exchange vs Centralized Exchange

Before we start discussing centralized and decentralized exchanges, let’s find out what a cryptocurrency exchange is!

A cryptocurrency exchange is a place where you can buy or sell cryptocurrencies. Each cryptocurrency exchange has its own rules and regulations, but they all give you the power to buy and sell the most popular cryptocurrencies. There are 2 types of exchanges: decentralized exchange (DEX) and centralized exchange (CEX) .

1.1. What is DEX?

DEX (Decentralized Exchange) is a peer-to-peer marketplace for the transactions of different Cryptocurrencies. DEX is not managed and controlled by an intermediary organization. Instead, all transactions in the DEX are automated through Smart Contracts. In other words, the user’s assets are being held by themselves. Only when users have a demand, they will connect it to the exchange and disconnect when the transaction is complete. According to statistics from Defipulse, the Total Value Locked (TVL) in DEX exchanges at one point exceeded $27 billion (early May 2021). Compared to CEX exchanges, this number is still far away.

The DEX appeared later with an aim to solve the existing limitations on CEX exchanges. By allowing users to manage their own assets, CEX greatly reduces large-scale cyber attacks. Hackers will have to attack each individual instead of focusing on the whole exchange as before. Binance DEX, Uniswap, and Curve are the DEX exchanges that we will probably see a lot in the future. 

1.2. What is CEX?

CEX is similar to the model of traditional stock exchanges, which involved an intermediary. CEX is managed and administered by the founders of the exchange. This organization acts as a third party to store assets, regulate exchanges and collect transaction fees. The operation of CEX is straightforward. To be able to work on the exchange, the user must go through “Know Your Customer” identification (KYC verification) to make a deposit in fiat or digital currency. The funds are transferred to an exchange-controlled custodial wallet. As a result, users do not have access to private keys.

In addition, CEX also owns user-friendly features, being considered a suitable exchange for newcomers. It can simplify the cryptocurrency trading process, making it more convenient for users to invest. But when it’s come to the cryptocurrency ban, CEX will be affected first. And of course, DEX favour is inevitable. 

II. Key differences between Decentralized Exchange vs Centralized Exchange

You can easily see that the biggest difference between Decentralized Exchange vs Centralized Exchange (eg Binance, Coinbase…) is in safety, custody and anonymity. More specifically, you can take a look at the table below to get an overview:

CriteriaCEXDEX
Security and safetyAlthough CEX is equipped with many optimal network protection solutions, it can not get rid of serious hacks. At that time, your property will be lost.The DEX operates on the blockchain with smart contracts and a peer-to-peer network. It is impossible for hackers to attack the DEX exchange.
CustodialityThe exchange has fully control of all transactions and user assets.Users have full and direct control of their assets as they hold the private key of the wallet.
AnonymityAnonymous trading for exchanges is impossible because CEX strictly adheres to government regulations on KYC and AML.Users can freely transact anonymously without identity verification.
AuthenticityCEX has the ability to manipulate and use users’ assets. They can create fake trades, adjust trading trends for their own profit.Because of the transparency and fairness that blockchain technology brings, the DEX cannot interfere in transactions or manipulate users’ assets.
Transaction feeFees will be charged. Each exchange will stipulate different fees.No fees or very low fees for order matching on the blockchain.
Transaction speedEach transaction will take an average of 10 milliseconds to execute.It takes a minimum of 15 seconds for the transaction to go through.
PasswordPassword can be recovered after verification.If 12 wallet recovery phrases are lost, assets cannot be recovered.
User guideSimple operation, easy to perform.Many operations, requiring higher knowledge and skills.

III. Advantages and disadvantages of Decentralized Exchange vs Centralized Exchange

From the differences between Decentralized Exchange vs Centralized Exchange, we have draw a conclusion of some advantages and disadvantages of these 2 exchange:

Decentralized Exchange vs Centralized Exchange blockchain

3.1. Pros and Cons of DEX

Advantages

  • Anonymity: Working with DEX eliminates the need for KYC. When registering, inputting personal information is not needed. This ensures that all transactions are as private as possible. Therefore, users will not experience data leakage or private information.
  • Low cost: There are 2 advantages of DEX to help investors save costs. Firstly, the number of trading pairs through the DEX is relatively large, which makes the transaction fees low. Secondly, the gas fee is not under the control of any unit, organization or 3rd party. Transactions are less expensive since there are no intermediaries
  • Wide range of tokens selection: DEXs have an almost limitless number of tokens. Because anyone may build an Ethereum-based token and a liquidity pool for it, there will be a wider range of projects to choose from, both verified and unvetted. 

Disadvantages

  • Complicated usage: The DEX mechanism owns any coin through a swap operation. In some cases, for coins that are less popular or do not have much liquidity on that DEX, users will have to swap through many different intermediaries. This inadvertently causes gas charges to rise higher than usual.
  • Difficult to control: Although anonymity is a great advantage of DEXs, from a management perspective this is also one of its own disadvantages. When the hacker moves those coins to the DEX and does the swap, there is no way to detect it. So this is also one of the disadvantages of this type of floor that you should also note.
  • Slippage: For DEX exchanges operating under the AMM mechanism, when users make a transaction with too large a volume, excess liquidity in the pool will lead to price slippage causing heavy losses to investors.

3.2. Pros and Cons of CEX

Advantages

  • User-friendly: Cryptocurrency terms are the biggest barrier for newcomers, but CEX will remove this. Most CEX exchanges operate similarly to traditional stock exchange models. So, in a way, it’s quite familiar to the vast majority of users.
  • High liquidity: The first advantage of CEX is the large trading volume. Typically, Binance regularly conducts more than 30 billion USD of trading volume every day. CEX meets the needs of new investors for seamless asset exchange. As for long-time investors, CEX offers the ability to transfer cryptocurrency in and out in minutes.
  • Support currency conversion: CEX exchanges usually support currency conversion between Fiat (fiat) and Crypto (cryptocurrency). This creates an advantage for new investors as they can exchange their fiat for cryptocurrency. Example: You can buy Bitcoin with US dollars.

Disadvantages

  • Fragile to attack: This is the biggest downside of CEX. Because the exchange centralize and store all investors’ assets, it accidentally becomes the focus of attention of cyber attacks. In fact, there have been many hacks with CEX exchanges already.
  • Strict KYC: Centralized exchanges often require very strict KYC policies. To make transactions, CEX forces users to upload their profile picture and a valid ID.
  • High-security risk: We do not deny that CEX has brought conveniences such as easy transactions, high liquidity, etc. But in return, CEX’s e-wallet always monitors and controls your digital assets. That is, CEX has ownership of the investor’s cryptocurrency. This shows that the CEX wallet creates a sizable security risk for traders and investors.

IV. Summary

It can be said that Decentralized Exchange vs Centralized Exchange are the two most popular crypto exchanges at the moment. CEX was born before DEX, but DEX is the main door to help users access the DeFi world in general. Since the DEX appeared, we have seen the concepts of Yield Farming, Liquidity Mining, etc. However, CEX will be suitable for a new user, who has just entered the cryptocurrency market. 

If you want to seriously invest for long term, DEX is a safe place to help you protect your assets from hacker attacks. Despite that, to use the DEX exchange requires you to have certain knowledge and skills. So do your research thoroughly to make sure you don’t make any mistakes.

If you are searching for a top blockchain company with in-depth domain knowledge that has worked on various blockchain projects with the most reasonable price, feel free to contact the team of blockchain developers at Pando Infinity.

Read more:

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Top blockchain development companies in 2022

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