3 Key Differences Between Centralized Exchanges & Decentralized Exchanges in Crypto
What’s all the fuss about CEX vs DEX and benefits?
With so much talk of cryptocurrency in the news lately, you may have come across the terms centralized exchanges (CEX) and decentralized exchanges (DEX) and wondered what they meant.
In this article, we’re going to define centralized and decentralized cryptocurrency exchanges as well as examine the various distinguishing features of each platform.
What are centralized exchanges?
Centralized cryptocurrency exchanges also known as centralized digital currency exchanges (DCE) are third-party controlled online platforms where traders can buy and sell cryptocurrencies.
The third-party, typically a broker or fund manager, oversees transactions on behalf of either the buyer and or seller.
The transactions carried out by these third parties are not tracked on the blockchain.
Furthermore, there is no anonymity for clients as they must provide personal information in order to verify their accounts.
However, thanks to the regulation and licensing requirements of this particular exchange, investors have legal protection.
This type of exchange is recommended for first-time crypto investors as most centralized exchanges provide some sort of technical support and help in the event of any problems.
Examples of centralized exchanges include:
· Traditional cryptocurrency exchanges — Binance, Coinbase (Pro), Kraken, Huobi Global, Bithumb, Bitfinex, Bitstamp, KuCoin
· Cryptocurrency brokers — eToro, Swissquote, IG, City Index, AvaTrade, XTB, HYCM
· Cryptocurrency funds — Amplify Transformational Data Sharing ETF, Siren Nasdaq NexGen Economy ETF, First Trust Indxx Innovative Transaction & Process ETF, and Capital Link NextGen Protocol ETF.
What are decentralized exchanges?
Decentralized exchanges, on the other hand, are autonomous platforms whereby sellers and buyers can transact without the need of an intermediary party.
All transactions done by both sides are stored on the blockchain.
The unregulated nature of decentralized exchanges gives investors greater freedom to transact and trade even in regions where local governments may have banned crypto.
The biggest disadvantages of DEX platforms include their low liquidity, minimalist platform features, complexity, and longer transaction times.
These platforms are not very beginner-friendly for amateur investors.
Major differences between CEX vs DEX and benefits
So, what are some key differences between CEX vs DEX and benefits?
Now, let’s carefully examine the three most important differences in depth.
1. Control
One of the major differences between CEX and DEX is the issue of who controls the trading account. By their very nature, CEX platforms involve a 3rd-party that typically has the most control.
DEX platforms differ significantly herein that the trader is in full control (or almost full control) of their trades and investments and generally executes them by themselves.
2. Security
Where issues of security are concerned, CEX platforms have been the subject of targeted attacks with over 122 in 2020 alone owing to vulnerabilities linked to how transactions are enacted.
DEX platforms on the other hand are more secure because each transaction is recorded on the blockchain using encryption that is difficult to hack.
3. Regulation
Regulation is certainly an aspect that serves to differentiate the two types of exchanges. CEX platforms are strictly regulated and licensing is required by local regulatory authorities before enterprises can begin trading.
Whereas with DEX, these platforms have zero regulation hence their decentralized name and there is no need for licenses. The resulting disadvantage of this however is that these platforms tend to be very complex both in design and functionality.
To read more about what’s happening in the world of digital assets, be sure to check out my blog Why The Recent Rise in Cryptocurrency Exchanges.