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Cryptocurrency exchange guide
Centralized vs decentralized crypto exchanges. What's the difference and what's best for you?

Centralized vs decentralized crypto exchanges. What's the difference and what's best for you?

Quick take:

  • CEXs have easier to use but you don't control your crypto stored on the platform
  • DEXs are more complex but you have full authority
  • CEXs are generally better for beginners while DEXs are better for more experienced traders

What's the difference between CEX and DEX? 

Centralized exchanges (CEX) are the most popular type of trading platform for investors, as they function much like an online brokerage account.

CEXs match buyers and sellers via an orderbook and allow users to trade digital assets with ease.

However, since these exchanges are centralized, they have control over user funds while trading is taking place. This can be a risk for some traders, as it leaves their funds vulnerable to potential hacks or other malicious activities.

The other issue some people do not like is, as these exchanges are regulated by the financial authorities of the countries they operate it, they require detailed KYC (know your customer) data. You'll have to give them images of your photo ID and personal details to use them.  

If things go wrong with centralized exchanges, they can be very bad.  

Take, for example, the issues with FTX. As soon as that centralized entity declared bankruptcy, the funds people had deposited there were locked away. 

This is one of the primary issues with a centralized exchange. 

You're relying on this intermediary to keep things going and to keep it all above board.  

Decentralized exchanges (DEX) offer a more secure alternative to CEXs by allowing users to retain control over their funds while trading.

These autonomous financial protocols are powered by smart contracts that enable crypto traders to convert one digital asset for another with all transactions viewable on the blockchain.

DEXs also provide greater privacy than CEXs, as users do not need to provide personal information in order to use them. While DEXs may be more secure than CEXs, they often lack the liquidity and user-friendly interface that many investors prefer when trading digital assets.

Pros of centralized crypto exchanges 

Centralized exchanges might be considered to be less secure, but they do offer a number of benefits that make it easy to get started buying and selling cryptocurrency. 

Easier fiat<>crypto transactions

Centralized exchanges typically support fiat to crypto on and off-ramps, meaning that they allow you to buy bitcoin with US dollars or other fiat currencies.

This process is often referred to as “converting” fiat money into cryptocurrency. Similarly, these exchanges also offer crypto to fiat conversions so users can convert their cryptocurrencies back into a fiat currency of their choice.

This process is not only made super simple by the centralized exchanges, but it's highly useful for those who want to cash out their profits from trading cryptocurrencies or those who need access to funds in a different currency than what they currently hold.

It is important for users to be aware of any fees associated with these conversions before making any decisions about which exchange they will use for their conversion needs.

Generally easier to use

CEXs have made it easier than ever for users to enter the crypto space.

Their user interfaces are designed to be intuitive and easy to use, even for those who are new to the world of cryptocurrencies.

For example, Binance offers a lite version of their platform which allows users to make basic trades without needing to understand complex terms like ‘going long or short’. This makes it much simpler for newbies to get started with trading cryptocurrencies.

CEXs also provide a familiar experience for traditional investors who may be looking to transition into the crypto space.

Many CEXs function in a similar way as online brokers, allowing users to buy and sell assets quickly and easily. This makes it much easier for experienced investors who are used to traditional markets to make the switch over into cryptocurrency trading.

Overall, CEXs have made it much simpler for both newbies and experienced traders alike to enter the crypto space with ease.

Increased number of features

CEXs usually come with a variety of different features that aren't just for trading A for B right now. You can also use the better crypto exchanges to invest longer term in currencies. Here's a few examples of the more advanced features centralized exchanges often provide. 

One of the most popular features offered by CEXs is margin trading. This allows users to borrow funds from the exchange in order to increase their buying power and potentially earn larger profits on their trades.

Crypto derivatives trading is also available on some CEXs, allowing users to speculate on the price movements of various digital assets without actually owning them. Exchange staking is another feature that allows users to earn rewards by holding certain digital assets on the exchange for a set period of time.

Finally, margin lending is an option that allows users to lend out their funds in order to earn interest payments from other traders who need additional capital for their trades.

All of these features make CEXs an attractive option for both experienced traders and those just getting started with cryptocurrency investing.

Trading volume and liquidity

The primary advantage of centralized exchanges is their high trading volumes. These platforms are highly liquid, meaning that assets can be exchanged quickly and easily.

Binance regularly records more than $30B in daily trading volumes.

This makes it an ideal platform for both newbies and experienced traders alike.

For newbies, these active platforms essentially guarantee that their assets can be exchanged seamlessly at any time.

For experienced traders, CEXs provide a way to move relatively large amounts of funds in and out within minutes.

Cons of centralized exchanges

While centralized exchanges make it much easier to invest and trade cryptocurrencies, they're not without their drawbacks.  

Know your customer (KYC) can be a pain

Strict Know-Your-Customer (KYC) policies are a common requirement for users of centralized exchanges.

These policies require users to provide personal information, such as a photo of their face and a valid identity card, in order to buy and sell cryptocurrency or make withdrawals.

This can be an issue for those who value their privacy when trading, as it requires them to share sensitive information with the exchange.

Also, in our personal experience sometimes you can be waiting weeks or months for your KYC to be approved. I submitted my KYC documents to one of the large crypto exchanges and it took them 3 months to approve me to use the platform. 

By that time, I'd already moved on to use a different platform. 

Centralized point of failure for hackers

Cryptocurrency exchanges have become prime targets for cybercriminals looking to get their hands on digital assets.

Over the years, we have seen several infamous crypto exchange hacks that have resulted in billions of dollars worth of losses.

These attacks are often sophisticated and well-planned, making it difficult for exchanges to protect user funds from malicious actors.

Exchanges must take extra precautions to ensure the security of user funds.

This includes implementing robust security protocols such as two-factor authentication, cold storage wallets, and regular system audits.

Additionally, exchanges should also provide users with a secure platform to store their digital assets and offer insurance policies in case of any unexpected losses due to hacking or other malicious activities.

By taking these steps, exchanges can help protect users from becoming victims of cybercrime and reduce the risk of large-scale financial losses due to hacks. Thankfully, some of thelarger platforms have added insurance into their own platforms for their users.  

You don't control your crypto

The wallets used on centralized exchanges are custodial, meaning that the exchange holds authority over your crypto.

This means that if the exchange is hacked or goes bankrupt, you could lose all of your funds.

The phrase “not your keys, not your coins” has become a popular mantra among cryptocurrency users.

It emphasizes the importance of using non-custodial wallets to store crypto assets. Non-custodial wallets give users full control over their funds by allowing them to store their private keys themselves.

This eliminates the risk of losing funds due to an exchange hack or bankruptcy since only the user has access to their private keys.

By following this advice and using non-custodial wallets, traders and investors can ensure that their crypto remains safe and secure at all times.

Pros of decentralized crypto exchanges

Generally speaking, centralized exchanges are great for people who are looking to start their journey into crypto. 

The advanced features like margin trading is also good for those of us who want to action more complex and sophisticated trades. But there are also a number of benefits to using decentralized exchanges as well.  

Security is strong

This is because DEXs are non-custodial, meaning that users’ private keys and funds remain in their own wallets instead of being held by the exchange.

This makes it much harder for hackers to target the exchange and access user data or withdraw funds.

Another benefit of decentralized exchanges is that there is no need for identity checks, which eliminates the risk of leaking private user data.

This means that users can remain anonymous while trading on a DEX, providing an additional layer of security.

Since all transactions occur directly between two parties without any third-party involvement, there is less chance of fraud or manipulation.

All in all, decentralized exchanges provide a much higher level of security than centralized exchanges due to their non-custodial nature and lack of identity checks.

Better privacy for users

Privacy and anonymity are two of the most important aspects of using a decentralized exchange. With a decentralized exchange, users do not need to provide any personal information or go through an identity verification process.

All that is required is for the user to connect their wallet and sign a transaction. This means that users can remain anonymous while trading on the platform, as no personal data is collected or stored by the exchange.

The lack of identity verification also makes it much harder for hackers to gain access to user funds as they would need to know the private keys associated with each account in order to do so.

This provides an extra layer of security for users who want to keep their financial activities private and secure from prying eyes. 

Wider range of crypto

Unlike centralized exchanges, DEXs are not limited to the agenda of a central entity, allowing users to find and invest in projects they are interested in. T

his provides traders with the opportunity to become early adopters in new projects that they may have otherwise missed out on.

For those who don't mind doing their research on new projects, a DEX is the ideal place to start trading. Not only do these platforms offer access to a wide variety of coins and tokens, but they also provide users with more control over their funds as well as greater security due to the lack of a central authority.

The only issue is that the greater number of currencies could mean that there are more risky currencies that are not good investments. Remember to always do your own research. 

Cons of decentralized exchanges

The key pro of decentralized exchanges is the security elements. However, they're not the perfect solution.  

Here's where they may fall short of your needs.  

Liquidity for larger investors

Liquidity is an important factor for any investor, especially larger ones.

DEXs have been gaining traction in recent years, but they still cannot compete with the largest CEXs when it comes to liquidity.

This means that large orders can face unplanned additional costs called “slippage” due to insufficient liquidity.

Furthermore, institutional investors may struggle to deal with DEXs that do not submit to similar regulatory requirements as CEXs.

To address this problem, new aggregator protocols have emerged specifically to help larger investors avoid liquidity problems when using DEXs. 

It's still not completely clear whether or not this will level the playing field in terms of liquidity. 

Regulatory issues

The growing popularity of DEXs may be due to their success in avoiding certain regulatory hurdles.

DEXs are not subject to the same know-your-customer (KYC) or anti-money laundering (AML) standards as centralized exchanges (CEXs).

This allows them to operate autonomously, without having to act as a financial intermediary or counterparty.

It's great for the DEX as they get to operate with less oversight from the bodies created to protect consumers. 

however, this could be a risk for investors as there's no one to make sure the DEX is operating as it should be nor is there any real recourse should things go wrong for you. 

Impermanent loss

Impermanent loss is a major problem for decentralized exchanges (DEXs).

It occurs when liquidity providers contribute to a pool of assets, but are unable to withdraw the exact number of tokens they put in.

This is because the ratio of different tokens held in the pool changes as trades occur, and it cannot promise all providers their exact tokens.

As the ratio adjusts to reflect current wider market prices, the pool will contain more of whatever token is losing value and less of the one that gained value.

This means that liquidity providers will end up withdrawing more of the token that lost value and less of the one that gained value, compared with their starting assets.

This can be a significant issue for DEXs since it reduces incentives for liquidity providers to participate in these pools.

If they are not able to get back what they put in, then there is no reason for them to provide liquidity. This could lead to reduced trading volumes on DEXs, which would be detrimental for users who rely on these platforms for their trading needs. 

Efficiency and speed

DEXs not as fast and efficient as CEXs.

This is because most blockchains have scalability issues that limit the number of transactions that can be processed at any given time.

DEXs can become congested during periods of high trading activity, leading to slow transaction speeds and higher fees.

CEXs vs DEXs - who wins? 

Both come with benefits and drawbacks. 

There is, unfortunately, no one size fits all answer for this.  

Generally speaking CEXs are better for beginner investors looking to enter the space. 

DEXs tend to be better for those with experience and higher risk tolerance.  

If you want to see what other users think of the various CEX and DEX crypto exchanges available, check out thew crypto exchange review category here.

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