Crypto Explained

Centralized Exchanges (CEXs) vs. Decentralized Exchanges (DEXs)

December 21, 2021


An image of BTC icons circling a digital representation of a CEX and a DEX.

What is a CEX? What is a DEX? Centralized Exchanges (CEXs) and Decentralized Exchanges (DEXs) are different types of cryptocurrency exchanges. What's the difference? And which is best for you?

As interest in cryptocurrencies continues to rise, more investment and trading options are available than ever before. While most people start out purchasing cryptocurrencies through a centralized exchange (CEX), as decentralized finance (DeFi) continues to grow, so do decentralized exchanges (DEXs).

But what's the difference between a centralized exchange and a decentralized exchange?

Centralized exchanges (CEX)

In the early days of Bitcoin (BTC), acquiring coins was a challenging task. Two individuals carried out the first-ever BTC transaction on the Bitcoin forum who exchanged 10,000 BTC for two Papa John's pizzas, negotiating the price between themselves and officially creating the world's most expensive pizza. 

[Read now: What's the difference between CeFi and DeFi?]

It wasn't until 2012 that the first centralized exchanges (CEXs) began to appear, enabling BTC purchases with bank transfers. Centralized exchanges act as intermediaries between traders and custodians of the traded assets. Since the exchange holds your funds for you, it is vital that you choose a digital asset trading platform with a solid reputation that complies with legal requirements, including KYC and AML checks, institutional-grade security, and customer protection.

Less trustworthy CEXs are sometimes criticized due to exchange hacks and exit scams in which users were unable to recover their coins.

However, with multiple layers of complexity surrounding the purchase and storage of cryptocurrency, centralized exchanges facilitate the entry of more people into the market. Moreover, centralized exchange technology is improving and, although 2020 saw massive growth in the crypto market, crypto crime fell by 57% from the previous year.

Centralized exchanges have also greatly expanded their offerings beyond purchasing BTC in a spot transaction. Most now also list different types of coins, tokens, trading pairs, and some even offer the ability to margin trade or trade futures contracts

Further, exchanges like EQONEX are suitable for institutional traders that require institutional-grade technology, bullet-proof custodial solutions, deep liquidity, and advanced risk management and portfolio solutions. 

Decentralized exchanges (DEXs) 

Decentralized exchanges (DEXs) have been rising in popularity as they allow transactions to occur without a third party.

Since DEXs do not involve any centralized parties, they are not subject to regulatory scrutiny, meaning users don't have to go through KYC checks or even open an account to trade. 

DEXs allow anyone with an internet connection to participate in investments or access a loan without needing a credit score.

Traditional investors who are held to the same exacting standards as financial institutions will not be able to trade their clients' funds on an unregulated entity. 

Another significant difference between CEXs and DEXs is the much higher volume of cryptocurrencies listed on DEXs. Again, this comes down to a lack of regulation. Only a fraction of the estimated 10,000 cryptocurrencies in 2021 are available on CEXs as they may not have proven their tokenomics, satisfy security protocols, have sufficient trading activity, or comply with legal standards. 

Trading on a DEX is riskier than a CEX as assets will often have higher volatility, and scams and fake projects still abound in the DeFi space. DeFi accounted for over 75% of crypto hacks and scams in 2021. Some of the more popular DEXs also have very high transaction fees as they are built on top of the Ethereum blockchain that suffers from high gas fees

DeFi is ceasing to be a level playing field and is increasingly overtaken by large whale traders.

CEX or DEX: Which is better?

Trading on DEXs isn't for everyone. Users must custody their own funds and learn how to interact with clunky interfaces and platforms built with emerging technology that may suffer from protocol breaches or bugs. 

DEXs remain too complicated for the average user to engage with and have no backup should something go wrong, such as a bug in a smart contract that causes all funds to be drained.

CEXs are far more user-friendly and a much easier introduction into the world of cryptocurrency investing than their decentralized counterparts. Additionally, if regulation and security are essential to you, a CEX is the best way to go.

Whichever way you decide to interact with cryptocurrencies, always be sure to do your own research and never invest more than you can afford to lose. 

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