CEX and DEX: Which is better?

CEX and DEX: Which is better?

Centralized exchanges are platforms that provide crypto services to users while being in control of users’ assets. Some famous examples of CEXs are; Binance, Huobi, Kucoin, and Gemini. Decentralized exchanges on the other hand are exchanges that allow users access to crypto services while users maintain full control of their assets. This means that users of DEXs have their private keys. Popular examples of DEXs include Pancakeswap, Uniswap, Sushiswap, and 1inch exchange.

The debate between CEXs and DEXs has been ongoing for a long time now. While many crypto users strongly believe decentralized exchanges are better than centralized exchanges, some others hold on to a reverse opinion. This article highlights the benefits and drawbacks of using both.

Centralized Exchanges

Centralized exchanges have a lot of beautiful features that are lacking in decentralized exchanges. At the same time, it has its disadvantages. What are the pros and cons of CEXs?

Pros of Centralized Exchanges

  1. Fiat-Crypto On-ramp

It is very easy to swap fiat currencies to crypto and crypto to fiat in centralized exchanges. Many CEXs allow users to buy crypto using a debit or credit card. This makes it easy for newbies especially to own a crypto asset. With just a few clicks and within a short time, a cryptocurrency can be purchased on centralized exchanges.

2.  Trading Volume

Centralized exchanges do not use liquidity pools. Rather, they use to order books to make buying and selling crypto seamless. Users who wish to buy an asset place buy orders. These buy orders are then matched with corresponding sell orders from users who want to sell their assets. The more users an exchange has, the higher the liquidity and the lesser the spread.

Thus, crypto users are usually drawn to exchanges with high volumes. At the moment, the Binance exchange has the largest trade volume with millions of traders around the world utilizing the exchange. On a daily basis, the exchange records over $30 billion in trade volume.

3.  Multiple Features

Many CEXs have multiple useful features. Unlike DEXs whose use is usually limited to swapping, staking, and farming, CEXs can be used for a lot more.

For instance, Kucoin exchange has a feature that allows traders to trade with a trading bot. Bingbon exchange is famous for its copy trading feature. Users are allowed to simply deposit and make profits or losses by automatically copying a more experienced trader.

Margin trading and lending are also popular in centralized exchanges. Many new features like NFT marketplaces can easily be added to CEXs.

4.  Ease of Use

Centralized exchanges are relatively easier to use when compared with decentralized exchanges. New crypto users will definitely get lost using decentralized exchanges. However, in CEXs, the user interface is usually easy to navigate through. Terms used in CEXs such as "buy" and "sell" are also easy to grasp. Additionally, some CEX platforms have a lite version as well as guides to help noobs succeed.

Cons of Centralized Exchanges

Centralized exchanges have their cons too. Some of these are highlighted below.

  1. Not your Keys, Not your Crypto

This popular term is being used in the crypto world to remind users of centralized exchanges that anything can happen to their assets at any time. Users of CEXs don't own private keys. As such, their assets are in the custody of the centralized platform. The owner(s) of a centralized exchange can decide to close down at any time and make away with users' funds. This has happened with several exchanges in the past.

2.  Lack of Privacy

Anyone using a CEX has to give up a level of privacy. Real names, email addresses, and identity cards, and even a document showing a user's address is usually submitted to centralized exchanges for verification. While this is done to curb fraudulent activities and financial crime, it has also prevented a lot of qualified individuals from benefiting from the crypto ecosystem.

3.  Hacks

Since CEXs came into existence, there have been countless hacks from cybercriminals on different exchanges. Kucoin, Hotbit, Huobi, and even Binance have been attacked in the past. Although, these attacks have sometimes been quickly noticed and stopped. Other times, attackers have been successful and went away with millions of dollars.

Decentralized Exchanges

Decentralized exchanges are regarded as the safest exchanges for crypto users. Just like CEXs, they also have their pros and cons.

Pros of Decentralized Exchanges

Some features that make decentralized exchanges unique are privacy and anonymity, as well as security.

  1. Privacy and Anonymity

Decentralized exchanges don't require users to submit personal details like CEXs do. All that's needed is to connect your personal wallet to sign blockchain transactions. Thus, anyone from anywhere can have access to cryptocurrencies using a decentralized exchange.

2.      Security

Decentralized exchanges do not have a database that stores users’ private keys. A user is in charge of his/her own private keys. As such, hackers can't attack DEXs to gain access to a central database. Unless a user gives up his private keys or interacts with malicious protocols his funds will always be safe and intact.

Cons of Decentralized Exchanges

Two major concerns about decentralized exchanges are the limited trading functionality and efficiency of DEXs.

  1. Limited Trading Functionality

Many DEXs lack exciting features like margin or futures trading. Limit orders help traders buy or sell an asset at a future price, but this feature is absent in decentralized exchanges. This makes users more attached to CEXs.

2.  Efficiency

A lot of blockchain protocols face scalability issues. This makes it difficult for DEXs to easily accommodate lots of users at the same time. The issue of scalability and efficiency is absent in CEXs. This is because CEXs operate both on-chain and off-chain, unlike DEXs which fully operate on-chain.

Closing Thoughts

DEXs give users total control of their assets and a measure of privacy. With CEXs, a user isn't in total control of his assets and lacks a core component of blockchain technology which is decentralization.

Beginners may find CEXs easier to navigate through. On the other hand, experienced traders who know their way in the crypto world and would like to have total control of their assets will fancy DEXs.

Users can also combine both. CEXs can be used when an individual wants to actively trade or buy and sell. DEXs can then be used for storing assets for the long term.