In this blog post we give you a crypto exchange guide to DEX and CEX. Before we get too in-depth about the differences between CEX and DEX, let’s look at what they both are. Don’t forget, if you have any queries, you can always give our team a call. Our crypto experts will happily share any advice or guidance with you to help you make the most of your crypto investment.
DEX stands for Decentralised Exchange. Meanwhile, CEX stands for Centralised Exchange. Both terms refer to platforms where cryptocurrency users can exchange, buy or sell their crypto coins in a seamless way.
CEX is popular amongst crypto users as it offers benefits such as guaranteed liquidity, exchanging crypto to fiat and ease of use. Meanwhile, CEX has lack of user complete ownership and lack of anonymity. DEX offers complete ownership of coins and control of private keys. DEX isn’t as popular for new investors and beginners in the world of crypto as it can be more complex to use and learn.
The real decision of DEX or CEX being better for you, is down to your personal needs and requirements from your investment.
If you’re not sure where to swap your currency and keep hearing about DEX and CEX but you’re still not sure what to do, we are here to help. While both are a type of exchange, there are fundamental differences between them both.
First, let’s look at what a crypto exchange is.
What Is A Crypto Exchange?
Cryptocurrencies are constantly evolving and changing. One of the biggest ways in which these changes can be seen is through the generations of cryptocurrency exchanges. There are now two types of crypto exchanges. These are the first-generation centralised platform and the decentralised exchange platform.
The easiest way to think about a crypto exchange is in the forms of stocks. Stock exchanges exist so people can buy, sell or exchange their stock. The same goes for crypto exchanges. They exist so people can buy, sell or exchange crypto coins. The possibilities for you as a crypto user, depends on the type of exchange you are using.
The Benefits Of Centralised Crypto Exchanges (CEX)
A centralised crypto exchange is a type of exchange platform that has been created and is owned by a centralised organisation. This organisation acts as an intermediary. It matches buyers and sellers.
• One of the defining features of CEX is that they are custodial. This means that when you want to trade on a CEX you keep your funds in a crypto wallet. This crypto wallet is tied to the exchange itself. This is ideal for investors that are new to the world of crypto because it makes it easier to manage while you learn more about cryptocurrencies and crypto exchanges. The exchange safely manages the private keys for your wallet. This leaves investors to focus on trading while the exchange handles that burden. This can be a very attractive benefit for some investors.
• Centralised exchanges are extremely liquid. They have the ability to facilitate trades by matching the ‘buying’ and ‘selling’ orders of their CEX users. This is commonly known as an order book. Centralised exchanges will tend to offer incentives to large-volume traders. This is because these large volume traders provide liquidity to their order books. Due to the fact that the trading figures are so high, it is likely that you will always find liquidity in the trade that you need.
• As we have already touched on, CEX are known for their ease of use. For most crypto users across the globe, a centralised exchange is where they make their very first purchase of cryptocurrencies. This will often be done on a credit card and is commonly known as ‘on-ramping’ into crypto. Centralised crypto exchanges will often have a clear and user-friendly interface to attract their target audience. This is something that CEXs have a reputation for and why they are so popular among new crypto investors.
• When you use a CEX as a crypto user, you will know your customers. You’ll know who you are buying from or who you are selling to. This is because every crypto user needs to produce documents that confirm their ID and sometime their address too. This is done to make a concerted effort against crypto coins and tokens being used as a way to launder money.
The Limitations of Centralised Crypto Exchanges (CEX)
As with all good things, they are some compromises to keep in mind too. Below we list some of the limitations that you have as a crypto user on a centralised exchange. A few of these limitations have spurred the creation and innovations of DEX.
• While the benefit of someone looking after the private keys to your crypto coins is a good thing for many, there is a downside. If they are not your keys, it means that they are not your coins. Letting the exchange look after the keys for you may seem like a good idea, but it means that whatever assets you have in your crypto wallet are not yours. If the exchange owns the keys to the wallet, you are relying on their security to look after your crypto assets. If the exchange is hacked or goes out of business, you lose your crypto assets too.
• One downside of CEXs that puts some crypto investors off is that there are barriers to entry. These have been set by the exchange themselves. For example, you may find that the particular coin you want to purchase is not available on that exchange. This is because, for some reason, the exchange has chosen not to offer that coin. Another barrier to entry could be that you live in a country where certain services or features of the exchange are not available to you, due to your location. This can give crypto users of the CEX limited access and mean they can’t do what they want to do on that exchange.
• As we touched on, due to the centralised crypto exchange there are fewer options and opportunities for the crypto user. This is because the exchange chooses which crypto coins can be sold, bought and exchanged through the platform. In turn, this often means that crypto investors won’t get an early bird advantage on new projects if purchasing through a centralised crypto exchange.
• CEXs exist as a distinct legal entity. This means that they are susceptible to sanctions and limitations from states. Examples of this have been seen in China and Iran for example, where not all states of fans of cryptocurrencies. It is possible that a CEX can be shut down or limited by external authorities. As we touched on with the ownership of the crypto coins and keys for the wallet – this means you could lose access to the crypto assets in that CEX platform.
A Brief Overview Of Decentralised Crypto Exchanges (DEXs)
Now you better understand centralised crypto exchanges, let’s look at decentralised crypto exchanges. They are known as the next generation of crypto and in some cases, for good reason too. A DEX allows you to buy, sell and trade your crypto coins, just like a CEX does. However, how it is done is different. The structure of a DEX compared to a CEX is fundamentally different.
For starters, there are two main types of a DEX. These are order-book based DEXs and automated market marker DEXs. An order book DEX is like a centralised exchange. It is the older generation of DEXs and will operate on a decentralised version of an order book. The exchange will use an algorithm to find and route trades between smart contracts and individual crypto users. It’s like a market, but there is no middle person selling for you – just an algorithm. This is how it is known as decentralised, not centralised.
Meanwhile, an automated market maker DEX embodies the recent swathe of crypto exchanges. It is also known as an AMM DEX. The AMM DEXs were originally created to overcome the key problem in cryptocurrencies – liquidity! Instead of matching crypto buyers and sellers on the exchange, a DEX carries out trades on its liquidity pools that are managed by the smart contract of the DEX. The liquidity of the DEX is sourced from users who either give their crypto assets in exchange for passive income, or as part of a broader yield farming strategy.
The AMM DEX itself sets the price of trades between crypto coins automatically. This is dependent on the supply and demand of those crypto assets. It is all done through an algorithm which is constantly rebalanced to reflect the changes in liquidity. It is not always and necessarily in sync with the rest of the crypto marketplace. This is what makes the AMM DEX a prime opportunity for those eagle-eyed crypto traders that are looking to make yield through arbitrage.
The Benefits Of Decentralised Crypto Exchanges (DEXs)
There are lots of benefits to decentralised cryptocurrency exchanges. We have listed the key benefits that we think may be of interest to you below.
• DEX does not exist as a central entity. This means that there is no platform for you to put funds into. Instead, you will connect the DEX to your existing wallet and use your own private keys to manage your funds. The benefit of this is that your coins will never be controlled by anyone other than you.
• When you use DEXs for crypto trading your privacy is respected. As DEXs have no interaction with fiat money, your ID will not be requested by the platform before using it or setting up an account. In turn, this means that your personal details and confidential information are not online for potential hackers to find.
• Through DEXs you will be able to buy, sell or trade a wider range of crypto coins. This is because decentralised crypto exchanges are not limited to the agenda of a central entity like CEXs. Instead, crypto users are more or less free to select the projects that they are interested in and start getting involved when they want to. This is a huge benefit for those crypto investors that want to be early adopters. In fact, DEX is often the first place these early adopters will go to invest.
• Many of the AMM based decentralised crypto exchanges offer their users governance tokens. This is done to further democratise the control of the platform. It is also done as a reward for the crypto investors that provide the platform with its liquidity. The benefit of this is that is enables the users of the DEX platforms to participate in decision making, processes and the future of the exchange.
The Limitations of Decentralised Crypto Exchanges (DEXs)
• DEXs have a less friendly and more complicated interface which can make them trickier for new or beginner crypto investors. The interface of a DEX platform can be harder to navigate and will often be tricky to understand for less experienced crypto traders too.
• Unlike centralised crypto exchanges, decentralised crypto exchanges will not accept payment in fiat (traditional currencies). This means that a decentralised crypto exchange can not be the first step for anyone entering the world cryptocurrencies or the crypto exchanges.
• Liquidity is the biggest issues for DEXs. This is the case for both standard DEXs and AMM DEXs. They will have their limitations for some users. A lack of available trading partners, for example, could result in slow trade time or even slippage for users of the platform. AMMs offering poor rewards for their liquidity providers could also find themselves with a deficit. This is something to consider when embarking on your journey into the world DEXs.
• While total freedom may sound like a good thing from a crypto exchange, it also means total responsibility. Self-custody will put you in the driver’s seat of your cryptocurrency investment. However, this also means that you need to deal with the storage and security of your crypto assets too. When trading through a DEX you can’t leave the coins on the exchange once you’re done. You also need to ensure that your crypto wallet is compatible with the platform and immune to risks.
• A great benefit of DEXs is that there is more choice and opportunity of which cryptocurrencies to buy, sell and trade. However, this means that it is even more important that you do your own research. Any crypto coin can be listed on a decentralised exchange. You need to do your own research to ensure that you project you are buying into is authentic.
Should You Choose DEX or CEX For Crypto Trading?
Now we have given you a brief overview into what CEX and DEX are, their differences, benefits and limitations, you can decide which is best for you. If you are new to crypto, we would recommend CEXs as it gives you a chance to learn while you are trading. However, if you have more experience in the world of cryptocurrencies then try DEXs. This will offer you more freedom and offers potentially better pay offs and opportunities for users too.
Cryptocurrencies can be a confusing investment opportunity for a lot of people. However, a little but of research and reading can really change that. Take the time to read our blogs posts and other articles across the internet. These will help you gain a better understanding of all things crypto so you can invest with knowledge. Afterall, knowledge is power.
Don’t forget, our friendly team of crypto investors are always at the end of the phone to answer any queries you may have or offer any advice and guidance.