TL;DR
A centralized exchange (CEX) offers cryptocurrency exchange services to registered users. Its primary service typically matches buyers and sellers with an order book, though a CEX may offer its verified users various crypto products. For beginners, a CEX provides the simplest way to get started without needing in-depth knowledge of blockchain infrastructure and tools.
A decentralized exchange (DEX) uses on-chain smart contracts to run its exchange services. In most cases, users swap tokens from liquidity pools, with liquidity provided by other users in exchange for swap fees.ย
You don't need to register for a DEX, meaning they're open to anyone with a wallet and some crypto. DEXs are the gateway to the decentralized finance (DeFi) world and provide users with a lot of freedom. However, they lack the support a CEX can give, and it can be easy to make irreversible mistakes when using them.
Introduction
If you've been doing your crypto research, you'll likely have come across DEXs. Perhaps you're already a customer with a CEX like Binance but are interested in using a DEX, or maybe you're looking to purchase the latest DeFi coin not currently available on CEXs.
No matter your story, you should know the crucial differences between a CEX and DEX before deciding which to use. Depending on what you want to do and your level of experience, each has its advantages and disadvantages.
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Why Are There Different Types of Exchanges?
If you're a new trader or only have experience in traditional finance, the difference between a CEX and DEX can be confusing. A CEX works similarly to what you'd find in the world of stocks โ a single entity operates using an order book in which market makers and takers place orders. The order book then matches buyers with sellers, taking a small cut of the transaction as a fee.ย
At the heart of the operation are the order book and exchange entity, making the model centralized. To use a CEX like Binance, you must create an account and verify your identity according to local regulations. The exchange will also take custody of the assets you want to trade on the CEX after youโve deposited them into your CEX account.
A DEX, however, is run through smart contracts, which are self-executing pieces of code on a blockchain. An entity or project may create and help run a DEX but it can, in theory, run itself as long as people provide liquidity to it.
Unlike CEXs, DEXs typically don't use order books to facilitate trading. Instead, they mainly use the automated market maker (AMM) model. To use a DEX, you only need a crypto wallet and some crypto (including enough for any gas / transaction fees). Due to its decentralized nature, there's no registration or account required of its users.
For newcomers, a CEX offers a more user-friendly experience and is an easier entry point. If anything goes wrong, you can contact the exchange's customer support team. A DEX also has several benefits but these are typically more attractive to experienced crypto users who value decentralization over ease of use.
Centralized Exchanges: Pros
User-friendlyย
A CEX like Binance focuses on providing user-friendly experiences for all kinds of users. Newcomers to crypto have access to simple conversion tools like Binance Convert, while experienced traders can use the Spot Exchange's TradingView tools. A CEX will also likely have detailed guides as part of its services (Binance Academy is one example).
The process of registering with a CEX is similar to opening a bank account. Many of us are already familiar with this system, and technical knowledge is not a must-have. Most CEXs offer payment with credit or debit cards, making your first crypto investment as simple as possible.
Support and protection
One of the biggest hurdles for crypto beginners when using DEXs is getting used to decentralized tools. Crypto wallets, addresses, gas fees, and other aspects of blockchain can be unforgiving when you make mistakes. There are no system admins to offer assistance, so you're on your own if you lose your seed phrase or send crypto to the wrong wallet.
You can avoid these pitfalls if you trade using a CEX. For example, customer support can help if you lose access to your Binance account, and there's no need to pay gas fees when moving your crypto around Binance's products. These measures support users and protect them from making the irreversible mistakes people sometimes make on DEXs.
More integrated services
A CEX can offer a wide range of products and integrated services, turning it into a one-stop crypto shop. On a CEX like Binance, you can access trading and staking services, an NFT marketplace, a launchpad, a P2P exchange, and more without leaving the platform. Moreover, moving funds among these different areas is simple. You can pay by card and even enjoy deals with partner merchants like Travala.
Centralized Exchanges: Cons
Susceptibility to attack
As large centralized entities, CEXs are frequently the targets of attacks, which means any user funds stored on a CEX are susceptible to theft. While CEXs prioritize security, they cannot eliminate the risk of hacks and theft. Over the years, several high-profile hacks have occurred, such as the Mt. Gox hack.
Additional transaction fees
Almost every โ if not every โ service you use on a CEX will incur a transaction fee. Often, it may be hidden or "baked into" the service. Due to their higher operating costs, CEXs may struggle to compete with the low transaction fees offered by DEXs. However, a CEXโs additional transaction fees must be weighed against the gas fees of using a DEX, which can be considerable on some networks.
No user custody of assets
When using a CEX, you must deposit your crypto into its wallet. This means you relinquish custody of your funds by entrusting them to the CEX. As such, you may be unable to withdraw them whenever you please. This is problematic if an exchange becomes insolvent and can lead to you losing your funds entirely. This situation is similar to storing your cash with a bank โ during a run on the bank, you may not be able to access your funds.ย
Decentralized Exchanges: Pros
Custody of funds
When using a DEX, you never lose custody of your funds until a trade or interaction is complete. This means you can move and store them as you wish. If your crypto is stored in a wallet whose seed phrase only you can access, you have total control over your assets. To decentralization advocates, this is one of the most critical factors.
Data protection and privacy
When using a DEX, thereโs no need to supply personal, identifying information and trust it to be stored securely. This means your personal data is safe from bad actors who want to steal your identity. Note that when using an exchange, you are still bound by local regulations and laws.ย
Lower barriers to entry
Using a DEX requires only a wallet and some crypto to trade and pay gas fees. This makes DEXs highly accessible to a larger group of people globally. For decentralization fans, this is a huge benefit, and many value the more private nature of a DEX. Of course, this should also be considered in the context of local legislation, as well as relevant debates on crypto regulation.
Decentralized exchanges: Cons
Complex to use and to enter
For a first-time user, understanding how to navigate and use a DEX can be challenging. Gas fees, liquidity pools, wallets, and slippage are all possible hurdles to overcome. It takes time to grasp how a DEX works confidently, and to invest responsibly, you should always understand your tools.
Lack of fiat on and off ramps
Historically, buying your first coin or token was one of the most significant barriers to gaining crypto exposure. CEXs now, as a standard, offer credit and debit card options for buying crypto. Although some DEXs are beginning to offer this service with third-party providers, most still don't allow credit or debit card usage.ย
Liquidity struggles
DEXs, on average, have smaller volumes and less liquidity than large CEXs. Market depth can be smaller, and large trades on a DEX may have a more significant price impact than if done on a CEX. Traders or investors making large volume orders can often find a better price doing over-the-counter (OTC) trades or using a CEX with deep order books, like Binance.
Should I Use a DEX or a CEX?
By far, the simplest experience for a crypto beginner is to use a CEX. It removes the initial learning curve associated with decentralized blockchain infrastructure. If you face any issues using a CEX, a support team will help and guide you as much as possible.
Overall, the chances of making an irreversible mistake like losing access to your funds or transferring it to the wrong address are much lower with a CEX. So if it's your first time gaining crypto exposure or you prefer a more straightforward, digestible service, a CEX is for you.
A DEX, on the other hand, is an excellent gateway to the world of DeFi. With a single Ethereum Virtual Machine (EVM) wallet, you can explore the vast DeFi universe. A DEX is a versatile option for crypto power users and offers a high degree of freedom.
If you're looking to invest in an extensive range of new projects with low market caps, a DEX is also your best bet. While CEXs often launch new tokens, DEXs still facilitate most new token sales and liquidity.
Considering the above, and to help you decide at a glance, refer to the following use cases for each exchange type:
Closing Thoughts
If youโre considering trying out a DEX, you need to do your own research beyond what is mentioned this guide. Though the benefits sound appealing to some, we recommend making sure you fully understand how to use one and its associated tools.
For more information on the topic, refer to our What Is a Decentralized Exchange (DEX)? article. If youโre happy with the services offered by the CEX youโre using, thereโs no need to switch. For many, a CEX offers the right balance of ease of use and available support.