Choosing the Right Exchange, CEX vs. DEX: Understanding the Difference Between Centralized and Decentralized Cryptocurrency Exchanges

Cryptocurrencies have taken the world of finance by storm, with high returns and losses to those brave enough to invest. With the rapid rise of crypto came rapid development of the supporting infrastructure. One key piece of this infrastructure are cryptocurrency exchanges, allowing investors to buy, store and sell their digital assets. 

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Illustration: Milica Mijajlovic

CEX vs. DEX, but with so many different types of exchanges, how can you decide which one is right for you?

Currently, there is a debate around Centralized Exchanges (CEX) and Decentralized Exchanges (DEX), both having their unique advantages and disadvantages. With that in mind, let’s look at the major differences between these two, the pros and cons, to help you decide which is suitable for your needs. Let’s see the differences – CES vs. DEX.

What is a Centralized Exchange (CEX) 

The most prominent examples of CEXs are Binance, Coinbase, and Kraken, to name a few. But what makes them a CEX? Centralized, in essence, means that a single entity (private company) is running the exchange and that to be able to trade, you need to perform a KYC (know your customer) and AML (anti-money laundering) verification processes before you can deposit and trade your digital assets. You will be providing the exchange with pictures of your government ID, and you will need to send them proof of residence by sending them a utility bill or other proof.   

The CEX keeps an order book, a collection of buy and sell orders posted by traders on the online trading platform, which helps facilitate currency exchange.  

CEX – What are the pros? 

  • Easy to use – The user interface (UI) is often tailored to be as easy to use as possible, with prominent buy/sell buttons. You can buy or sell your digital assets with just one click of a button.  
  • Solid liquidity - CEXs are known for high trading volumes, allowing users to buy or sell the digital asset of their choice easily. 
  • Numerous currencies - Often these types of exchanges offer a wide selection of cryptocurrencies and a wide range of fiat currency pairs.  
  • Accessible support – Customer support is very pronounced, with usually a chat option followed by numerous contact options to handle all user’s concerns.  
  • Regulation – A CEX usually has certain regulations that it has to follow and laws to comply with in the field of money laundering and other illegal activities  
  • Advanced features – Charting software and other useful tools for professional traders are more often than not a part of a CEX platform.  

CEXWhat are the cons?

  • Security – As one central entity is running the exchange, users will have to trust it to safeguard their funds and private information. Malicious actors online usually target CEXs, and if they get compromised, users’ assets are often the first target. 
  • Privacy – While KYC and AML processes have a certain benefit, the fact that users have to scan and send their government-issued documents and other private information can be a real issue for users that value their privacy.  
  • Getting locked out – A CEX holds the user’s private keys and assets. And, if the exchange undergoes a Chapter 11 (bankruptcy), or faces some other issues, users will not be able to access their funds. 
  • Maintenance time – Technical issues that exchanges can face could potentially cause longer maintenance time, which in the crypto world can be a difference between a gain and a loss. During this time, the users will also not be able to access their funds. 
  • Fraud – Users are not safe from potential fraud that the management of the exchange can undertake, which can lead to massive losses for the exchange and the users themselves.  
  • Fees – Compared to a DEX, a CEX charges higher fees for all the major activities on the platform, like withdrawing and selling.  
  • No access to private keys – Almost all CEXs hold users’ private keys, without the users having access to them, which means a user does not have full control of their assets.

Case in point   

Among the first CEXs that went down was the now-infamous Mt. Gox in 2014, which filed for bankruptcy and had roughly 850,000 Bitcoins on its platform. Now, with hindsight, we know that the platform has been hacked a few times, and there were management issues inside the company. A more recent example is the fall of FTX, whose aftermath is still felt in the markets, where users lost millions. Everything is pointing to mismanagement of users’ assets, but time will show what really happened with the implosion of FTX.  

What is a Decentralized Exchange (DEX) 

A DEX allows users to trade their digital assets in a decentralized manner, which means that users buy and sell their assets using smart contracts on a blockchain. Furthermore, no single entity controls a DEX, meaning that users have full control of their personal information and all of their assets. Typically, a DEX is built on blockchain platforms that offer smart contracts, with Ethereum being the most prominent one.  

By using smart contracts, a DEX ensures full transparency, as the contracts are used to match orders. Private keys are owned by the users, which in essence, allows them to perform all functions with their digital assets without asking for permission from anyone.  

Among the more famous DEX exchanges are: Uniswap, Sushiswap, Curve, and Pancakeswap, to name a few.  

What are the pros? 

  • Full access to private keys – Users control their private keys allowing them to do everything with their digital assets.  
  • Better security – Decentralization, among other things, is less vulnerable to hackers and other security threats as there is no central point of failure.  
  • Better privacy – There is no need to provide personal information to a central authority, meaning that users retain their privacy on a DEX. 
  • Transparency – Smart contracts offer full transparency as transactions are settled on a blockchain.  
  • Lower fees – Compared to a CEX, a DEX has lower fees for all activities. 
  • Accessibility - A DEX can be accessed from anywhere in the world as long as there is a network connection.  

What are the cons?  

  • Low liquidity - Trading volume on a DEX is much lower compared to a CEX, which means more waiting time until a transaction is executed, especially when working with larger orders.  
  • Worse UI - The user experience is “less friendly, ” resulting in a worse learning curve, possibly alienating beginners.  
  • Customer support is not as good – More often than not, a DEX does not have a customer support team, making it harder to resolve possible trading or technical issues.  
  • Fewer assets - The number of cryptocurrencies a DEX owns is usually less than a CEX, further limiting the number of traders on the platform.  

Closing remarks – CES vs. DEX

So which one is for you? That will depend on what type of risks you’re willing to take. If you’re completely immersed in the decentralization that digital assets offer, then a DEX will definitely be your target exchange. On the other hand, if you have complete trust in a central authority and enjoy a wide range of assets and friendly UI then a CEX is for you.  

Advanced users take a hybrid approach, where they spend most of their trading time and keep their assets on a DEX, while still accessing a CEX for a specific cryptocurrency they want to trade or use the advanced tools to analyze a token they want. 

All in all, the good thing is that there are options, the competition is only increasing, and the beneficiaries will be the end users.  

Dino Kurbegović is a project coordinator and an investor and technology enthusiast with years of experience in managing complex projects. His journey into content writing began in 2014, covering finance, investing, crypto, technology and complex technical topics.