DEX & CEX
Unlike conventional markets, where all trading takes place on controlled exchanges, crypto traders have an option between centralized (CEX) and decentralized (DEX) exchanges.
Although both CEXs and DEXs provide the crypto trading capability, they operate in quite different ways. To begin, let’s look at their brief description.
1. CEX (Centralized Exchanges)
As the name suggests, centralized exchanges are crypto exchanges administered and controlled by centralized entities. The entity that manages an exchange acts as a middleman between buyers and sellers and is usually (but not always) regulated. Some of the most well-known CEXs are Coinbase, Binance, Kraken, and OKX.
CEX conducts trades using the Order Book. Every purchase and sale order is recorded and authenticated in the order book.
The order book lists all open orders for a given trading pair that are presently accessible on an exchange. An open order is another trader’s willingness to buy or sell a digital asset at a certain price.
A trader approaches the order book and enters an open order. That open order will stay on the order book until the trader who placed it cancels it or someone else accepts the offer.
Placing an order only ensures that others will accept the price. If another trader on the CEX makes a significantly superior offer, the better offer will be accepted first.
In CEX’s order books, there are two primary forms of orders: market orders and limit orders.
Market orders are mean to be executed at the current market price as quickly as practicable. In general, market orders give traders a larger probability that their orders will be execute immediately.
Limit orders are orders in which you specify the maximum or lowest price at which you are prepared to complete the transaction, whether a sale or a purchase.
Customers are often required to verify themselves before utilizing the services offered by centralized crypto exchanges, i.e., go through the KYC (“know your customer” process). In other words, exchanges must ensure that the persons using them are who they say they are, preventing illicit activity like money laundering. And for many crypto enthusiasts, it might be a deal breaker since anonymity is a major principle of the blockchain and crypto movement. Still, some exchanges let their clients utilize their services without verifying (e.g., Binance, ByBit, KuCoin). However, users may be restrict in trading transactions and withdrawal quantities in such circumstances.
Centralized exchanges (CEX) may be a better venue for trading for novice traders/investors and those who do not have much expertise with crypto trading since it is simply you putting the order without much need to comprehend how it works under the hood.
Furthermore, each CEX has its built-in crypto wallet, so you don’t need to download another one if you don’t want to since you may save your cash there (though, as we all know, storing funds on a crypto exchange is not the most secure approach as you do not own the private keys to the wallet where the funds are).
However, one of the CEX’s characteristics that may upset early adopters who like to participate in crypto projects during presales or at launch is that CEXes have a restricted amount of listed coins and tokens. Depending on your perspective, it may be fine: sure, DEXes have more tokens and currencies, but there are no rules, and anybody may put their currency there. This often leads to failed ventures and frauds, so consider it a double-edged sword.
Because CEXes have their reputation on the line and the possibility of losing their license (assuming they have one), they generally have a tight method for adding new coins. They only publish new cryptocurrencies when they are certain they will not be a hoax.
2. DEX (Decentralized Exchanges)
As the name implies, decentralized exchanges are exchanges in which no entity executes orders. To automate transactions and trades, decentralized exchanges depend entirely on smart contracts and dapps. PancakeSwap, Uniswap, and SushiSwap are some of the more well-known DEXs.
So, how does the decentralized exchange work? The solution is to use an AMM (Automated Market Maker) or a traditional order book model.
We’ve previously discussed how CEX order books function. However, with DEX, this approach works somewhat differently since there is no intermediary in control, and the procedure is entirely dependent on the algorithm.
A token owner submits an order to exchange one asset for another on DEX. The token owner determines how many units must be sell, how much it will cost, and the time limit for taking bids on the assets. Other traders might submit offers after the selling order has been place by placing a buy order. When the sellers have decided on a time, they analyze and carry out the offer.
It is worth mentioning that the majority of DEXes use the AMM model. Let’s take a closer look at how it works.
The liquidity of an asset and its swap pair are pool in a smart contract under the AMM Model. Those who contribute money to the pool are entitled to the fees created by the swaps in the pool. If a trader decides to swap the pool, the pool’s digital assets are immediately re-balance to a 50/50 value, and the token price adjusts to reflect the new supply. Suppose there is insufficient liquidity in the pool and a trader intends to make a substantial swap. In that case, the trader will encounter severe slippage, which indicates that the lack of liquidity will result in an above-market buy price. In such instances, a trader must either agree to pay a substantially higher price for an item or wait for liquidity to rise.
One of the most significant benefits of DEX is that it does not need authentication. Hence no KYC is required. That is, unlike CEX, you may maintain your privacy using DEX.
Another benefit of a DEX is the availability of tokens and currencies unavailable on controlled exchanges. Although this can work both ways, since some of these projects may be scams of any type, such as rug pulls, Ponzi schemes, and pump-and-dump schemes, DEX trading is rife with them. As a result, while investing in projects identified on decentralized exchanges, you must DYOR even more completely and carefully.
A DEX may allow you to invest in a project when it is still in the early phases of development and has yet to be list on major CEXs. Thus, you may profit significantly if a project you invested in proves to be a success.
It is worth noting that you cannot exchange fiat on DEX; this option is only accessible on CEX.
Another significant disadvantage of DEXes is that no one will ever reimburse your coins if your wallet is hack and your monies are take.
The Advantages and Disadvantages of CEX vs DEX
Since we’ve discussed what DEXes and CEXes are and how they vary, let’s look at the advantages and disadvantages of these two kinds of exchanges:
- Reliability: Every major centralized exchange goes to great lengths to earn the confidence and dependability of its users. That is why they follow the rules of the countries where they operate and control their activities to prevent any illegal activity. As a result, CEXs are increasingly popular among ordinary traders and investors.
- Support: CEX personnel are always available to assist you if you have any queries or need assistance during your trading activity. Online customer care help is undoubtedly available on certain DEXs. However, in the case of the CEX, it is built into their operating system.
- Liquidity: It is quite easy to discover buyers and sellers on centralized exchanges, particularly ones with millions of users. As a result, you are likely to encounter a circumstance in which you cannot purchase or sell a digital asset at a fair price.
- Simplicity: Currently, CEXs are more user-friendly and simple to use since they are aim at the typical trader, who may not know every aspect of crypto trading but instead prefers to stick to day trading or a long-term investment.
- Option trading: Major centralized exchanges may provide members with a wide range of trading options, including spot, futures, staking, loans, and even nft markets. That is, traders may conduct every kind of trading transaction they choose in a single location.
The Disadvantages of CEX
- Asset management: Instead of allowing you to keep your private keys in your digital wallet, most CEXs will act as a custodian for your digital asset in their digital wallet. While it is more convenient to trade daily, there are several significant drawbacks, including the danger of CEX failure or fraud.
- KYC and verification: This is only sometimes a disadvantage depending on how you look at it. However, those traders and investors who want complete anonymity while dealing with cryptocurrencies may find the authentication procedure a significant drawback.
- Decentralization: There are no constraints, no system monitoring, no norms, and no entity that regulates everything in DEXs. Users are held accountable for their actions and the repercussions of their actions, and smart contracts govern all transactions. And, since no one organisation is at the center of these procedures, no one can halt or freeze your payments.
- Anonymity: Because DEXs are find on DeFi principles, no authentication is necessary, and you may use them anytime you want, wherever you are. Nobody will prevent you from utilizing certain services only accessible to people who have elected to verify themselves completely. As a result, if you value your privacy, DEX can ensure it to the greatest extent possible.
- Custody: Users of DEX, unlike CEX, do not transfer their digital assets to a third party. Thus you always have access to your cash since they are hold in your digital wallet, and you are the only one who has private keys. You can still click a phishing link or be infect with a trojan virus, but only because of your carelessness.
- Fees: Almost every centralized cryptocurrency exchange charges a fee when purchasing and selling digital assets. The only thing you have to pay in decentralised exchanges is transaction fees, which vary from blockchain to blockchain. Still, it’s worth noting that petrol prices may sometimes skyrocket, and in such cases, a lack of additional taxes won’t help.
- More tokens and coins: Thousands of currencies are accessible on DEXs that are not available on CEXs. Some will make it and become successful, while others will become a hoax or fail. Investing in them may be a major risk, but the profit may be enormous. For example, Shiba Inu was first accessible solely on DEXs like Sushiswap and Uniswap and didn’t appear promising. It is now one of the top 15 cryptocurrencies in market capitalization.
- There is no trading to fiat: DEXes, unlike CEXs, do not allow you to exchange crypto for fiat, just crypto for crypto.
- Reduced liquidity: Due to the lack of volume and quantity of traders that centralized exchanges often have, it may be difficult to locate buyers and sellers on decentralized exchanges, particularly when dealing with tokens and currencies with low trading volumes. Even when data are compare, it is clear who has the advantage: Binance has over 90 million clients and over 14 billion dollars in trading volume (24h), whereas Uniswap, one of the biggest DEXs in the DeFi industry, has over 4 million users and approximately 938 million dollars in trading volume (24h).
- Slippage: The price difference between when a transaction is file and when it is verify on the blockchain is called slippage. It may occur in two scenarios: when liquidity is low or when trade volume is high. Thus, if you set the slippage to a high value, you will get fewer tokens for the amount you pay; yet, if you set the slippage to a low value, your transaction will only be processed. Slippage is entirely a DEX issue.
The selection of a Crypto Exchange Development Company is base on the trader’s preferences. As with all things, there are advantages and disadvantages, and neither trade method is ideal.
You may favor CEXs because of their popularity, user-friendliness, and amount of accessible features, or you may prefer DEXs because of their decentralization and control over your cash, anonymity, and uncommon currencies. However, no one limits your options, so you may utilize both kinds of these exchanges to counter the disadvantages of DEX and CEX.
No matter whatever sort of trade you use, you should always DYOR and observe all security precautions.