There are two major types of crypto exchanges, centralized (CEX) and decentralized (DEX). They are both used to trade crypto, but function in very different ways.
If you’re a beginner in the crypto space, chances are the crypto exchanges you know are centralized exchanges. A typical example is Binance, which is the exchange with the highest trading volume in the world.
Centralized exchanges are usually where new crypto users start, because they are much easier to use and are safer too. Centralized exchanges are also way older than decentralized exchanges, some of them almost as old as Bitcoin.
Decentralized exchanges on the other hand came onboard after the arrival of decentralized finance (DeFi), and so are much more recent. They are more suitable for experienced users and are more risky to use for several reasons.
In this guide, we will distinguish between centralized and decentralized exchanges so that you can decide which one is best for you.
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What is a Centralized Exchange?
As the name suggests, a centralized exchange is one that is centralized, that is it has a centralized entity that runs the exchange. The exchange enables trading of crypto assets through an order book.
The order book matches sellers with buyers, so that trades are filled without delay. Different types of trades are available on a centralized exchange, including spot, futures, margin, and even peer-to-peer.
Centralized exchanges are usually safer to use because you can contact the management in case you need help with anything. You also don’t need to worry about managing your funds once you deposit them on the exchange, as the management takes over control of it.
To use a centralized crypto exchange, you need to create an account and verify it because of regulatory requirements. This makes some people argue that centralized exchanges are not ideal for crypto trading.
What is a Decentralized Exchange?
A decentralized exchange is the opposite of a centralized exchange. While a centralized exchange requires an order book to match buyers and sellers to fill orders, a decentralized exchange uses an automated market maker.
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DEXs run on smart contracts, which are codes that are written with conditions for executing trades and doing other things. Therefore there’s little to no human interference in running a DEX. Orders are filled using liquidity pools, which are sustained by stakers.
They are also more complex to use, but give the user full control of their funds which are held in their wallet as they use the platform. You don’t need any form of registration to use a DEX, all you need is a wallet with some crypto in it.
Since they run on smart contracts, DEXs are self-sustained, and so there’s no way any human can help you should something go wrong. Hence, it is not a suitable crypto exchange to use for beginners who are not yet familiar with how blockchain technology works.
Pros of Centralized Exchanges
Centralized exchanges have a number of advantages over decentralized exchanges. The following are some of the advantages.
1. They are safer to use because they have a centralized entity beginners can contact should something go wrong.
2. There’s a high guarantee of liquidity for most crypto trading pairs
3. Scams are less common since users are registered and verified
4. You can access many services such as trading, staking, NFTs etc
Cons of Centralized Exchanges
Here are some cons of using centralized exchanges also.
1. They are custodial, i.e. they take over control of your funds, which is dangerous
2. They are more susceptible to attack than decentralized exchanges
3. Privacy invasion by registration and KYC
Pros of Decentralized Exchanges
1. Users have full control of their funds
2. Less susceptible to attacks
3. High privacy since you don’t need to register
Cons of Decentralized Exchanges
1. Quite difficult to use, so not suitable for beginners
2. Liquidity isn’t assured most times
3. Risk of a rug pull, which is the withdrawal of liquidity by the creators
Which Should You Use?
Depending on factors such as the asset you wish to trade, your experience level, and the services you wish to access, you can choose to use a centralized or decentralized exchange based on the points above.
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