There are pros and cons of both Centralized Exchanges (CEX) and Decentralized Exchanges (DEX). A person may use either or both depending upon the use case.
Blockchain and cryptocurrency together created Decentralized Finance (DeFi) wherein everything is community governed.
Then why is it that crypto exchanges, the gateways to DeFi, can be either centralized or decentralized?
CEXes are those which are controlled by a single authority or entity. All the powers of running and governing are vested in the owner of the exchange, for example, Binance
On the other hand, DEXes such as Uniswap are not owned by anyone. They are just a piece of code. The community which uses them participates in the governance procedures.
Both Centralized Exchanges (CEX) and Decentralized Exchanges (DEX) have their pros and cons.
There are a few integral qualities that mark the distinction.
Ownership of the Assets
CEXes are custodial in nature. It means that they have the Private Keys of all the crypto assets hosted on their platform. As it is said, “not your keys, not your coins.”
Whoever has the private keys, is the owner of the asset. So, CEXes have the power to use the crypto in whatever way they wish. If a CEX gets hacked, users’ funds can get lost, because they did not have custody of their assets.
Whereas, on a DEX a user just transacts crypto. The assets are kept in self custody which can be accessed by wallets like Metamask, Trust Wallet, etc. So, whoever has the access to the wallet controls the assets inside it.
Fiat Onboarding and Cash Out
CEXes support fiat onboarding and cash out. It means a user can deposit and withdraw fiat to buy and sell crypto and vice-versa.
DEXes do not support crypto to fiat or fiat to crypto conversions. They only support crypto to crypto conversions or transactions. They are hosted on blockchains that can only support the compatible tokens. And fiat is not compatible with blockchain. That’s why they have stablecoins.
However, there are decentralised P2P platforms like Bisq to buy crypto with FIAT.
Deposit Withdrawal Control
CEXes can suspend the withdrawal or deposit of crypto assets as per their discretion as they are centrally controlled. Many times due to glitches, CEXes do not process deposits or withdrawals or both.
However, DEXes are decentralized and always process any kind of transaction.
Listing and Delisting of Coins
In the case of CEXes, it is up to an exchange’s discretion whether to list or delist a coin.
A CEX would prefer to list a coin that would provide greater revenue and has a significant amount of popularity among investors.
On the other hand, there are no listing prerequisites on most Dexes, Anyone is free to create a liquidity pool on Automated Market Maker (AMM) DEXes like Uniswap, Sushiswap, etc.
For CEXes, the internal trading activity or the order book decides the price of an asset. The buy-sell orders decide the price.
On the contrary, in DEXes the price is decided by an algorithm, arbitrageurs, and traders.
A popular algorithm is the Constant Product Formula: x * y = k, where x and y are the reserves of two tokens, A and B respectively, and k is a constant.
Arbitrageurs trade between different DEXes and CEXes. They will keep on pocketing the difference until the prices are more or less the same.
Traders also play a big part in it. If they buy or sell more than the liquidity on a DEX, the price is impacted.
Anonymity or Pseudonymity
CEXes are bound to comply with law enforcement authorities. Hence, they require the KYC (Know Your Customer) details of their users to rule out money laundering and terror financing or any other illicit activity.
Since a DEX is just code, it does not require any identity proof from users. But, the transactions on DEX can be tracked on the blockchain.
So, this provides pseudonymity.
Transactions inside a CEX are just exchanges taking place within the database or server.
While transacting on a CEX, a user just has to pay the trading fee or brokerage, whereas on DEXes transactions happen on the blockchain which requires gas fees or transaction fees.
Trading on DEXes can be expensive due to the gas fees. DEXes also have a swap fee similar to the trading fee on CEXes. charge a withdrawal fee.
CEXes do not have gas fees. Most CEXes charge a transaction fee only on withdrawal.
It is up to a user which kind of exchange to use. Newbies generally use CEX to start their journey and begin using DEX as they become more familiar with the space.
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