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Decentralized Exchange vs Centralized Exchange - Key differences
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.
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) .
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.
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.
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:
|Security and safety||Although 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.|
|Custodiality||The 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.|
|Anonymity||Anonymous trading for exchanges is impossible because CEX strictly adheres to government regulations on KYC and AML.||Users can freely transact anonymously without identity verification.|
|Authenticity||CEX 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 fee||Fees will be charged. Each exchange will stipulate different fees.||No fees or very low fees for order matching on the blockchain.|
|Transaction speed||Each transaction will take an average of 10 milliseconds to execute.||It takes a minimum of 15 seconds for the transaction to go through.|
|Password||Password can be recovered after verification.||If 12 wallet recovery phrases are lost, assets cannot be recovered.|
|User guide||Simple operation, easy to perform.||Many operations, requiring higher knowledge and skills.|
From the differences between Decentralized Exchange vs Centralized Exchange, we have draw a conclusion of some advantages and disadvantages of these 2 exchange:
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.
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