Should I use CEX or DEX?

2022-11-15, 10:17

CEX vs. DEX — What are the differences?

Centralized Exchange (CEX): a type of cryptocurrency exchange that is operated by a company that owns it in a centralized manner.

Decentralized Exchange (DEX): a platform for exchanging cryptocurrencies based on functionality programmed on the blockchain (i.e., in smart contracts). The trading is peer-to-peer, or between pools of liquidity.

A decentralized exchange (DEX) has specific advantages over centralized exchanges. Compared to centralized exchanges (CEXs), decentralized platforms are non-custodial, meaning users’ private keys are kept by themselves when trading on a decentralized exchange platform.

The trustless, secure nature of these transactions is one of the core benefits of blockchain technology, and a DEX is an evolving invention among different DeFi products in an ever-expanding decentralized world.

But do we truly have to pick one over the other? As a crypto enthusiast, both CEX and DEX are useful in their own ways. In this article, we’ll dive deeper into how each differs in its own ways.

CEX — Centralized Exchanges

Centralized exchanges (CEX), like Gate.io, are online trading platforms that match buyers and sellers via an orderbook. They function essentially the same way as online brokerage accounts, which is why they are so popular among investors.

1. Benefits

Trading Volumes
Centralized exchanges are typically highly liquid. Binance, for example, regularly records more than $30B in daily trading volumes. 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.

Peer-to-Peer (P2P) Trading
Centralized exchanges typically support fiat to crypto on and off-ramps, meaning that they allow you to buy bitcoin with your native currency, for example.

More Features
Aside from the vast array of digital assets that CEXs support, they offer a lot more features other than exchanging one asset for another, such as margin trading, crypto derivates trading, exchange staking, and margin lending, among others.

Ease of Use
One endearing quality of most CEXs is the user interface. Considering that most newbies are unfamiliar with crypto pairs or simple terms like ‘going long or short,’ CEXs do a great job funneling users into the crypto space. Some CEX platforms, like Binance, have lite versions for users looking to make basic trades. Moreover, they function almost in the same way as online brokers, thus acting as a familiar face to traditional investors.

Bonus: Safety at Gate.io
We became the first mainstream crypto exchange to submit to a Proof-of-Reserves audit, cryptographically proving that user deposits were safely held by the platform through a Merkle Tree and earning a patent for the method in the process. In addition, Gate.io has a Secure Asset Fund for Users (SAFU) worth $100 million in place to protect both users and our native GateChain ecosystem.

2. Disadvantages

While centralized trading platforms offer many of the benefits investors are used to from their online brokerage accounts, they come with a handful of significant drawbacks.

Strict Know-Your-Customer (KYC) Policies
For users looking to maintain privacy while trading, a CEX is not the go-to exchange. Centralized exchanges are subject users to strict KYC policies. They typically require you to upload a photo of your face and a valid identity card to buy and sell crypto or make withdrawals.

Not your Keys, Not your Coins
While CEXs provide easy trading, high liquidity, etc., their wallets are custodial, meaning that they hold authority over your crypto. Gate.io recognized this demand from our clients, so we released Wallet.io, a decentralized wallet for investors who would like to keep their coins off our exchange.

DEX — Decentralized Exchange

Decentralized exchanges (DEX), like PancakeSwap or Uniswap, are autonomous financial protocols powered by smart contracts that enable crypto traders to convert one digital asset for another with all transactions viewable on the blockchain.

1. Benefits

The growing popularity of DEXs may in part reflect their success in dodging some regulatory hurdles. The company that builds a DEX avoids acting as a financial intermediary or counterparty and does not have to meet know-your-customer (KYC) or anti-money laundering (AML) standards because it operates autonomously. Several features attract users to DEXs, including:

Privacy and Anonymity
Using a decentralized exchange typically only requires you to connect your wallet and sign a transaction. No identity verification process is required.

Security
Decentralized exchanges are generally more secure than centralized exchanges for two reasons:

DeFi and NFT Integration
DeFi and NFTs are the two frontiers of the blockchain space, and DEXs are strong propellers. DEXs allows users to access the world of smart contracts and DApps that provide financial services, including lending and savings products, as well as NFT projects.

2. Disadvantages

While DEX provides some advantages over centralized exchanges, they also have drawbacks new crypto investors need to be aware of.

Limited Functionality
DEXs are currently limited in functionality. Features like margin trades, limit orders, futures, options, etc., are typically unavailable.

Efficiency
Decentralized exchanges are not as fast and efficient as CEXs due to the scalability issues faced by most blockchains. Centralized exchanges are not faced with this problem because they use both on-chain and off-chain mechanisms to ensure they run smoothly.

Liquidity
DEXs may struggle more than CEXs when working with larger investors. At this time, they cannot yet compete with the largest CEXs in size so they cannot offer as much liquidity. When they meet with insufficient liquidity, large orders can face unplanned additional costs called “slippage.”

CEX vs. DEX: The Bottom Line

Both types of crypto exchanges allow users to buy and sell crypto, with disparities in key elements such as liquidity, security, and usability.

The complete decentralization of a DEX drives in line with Satoshi Nakamoto’s basic ideas in Bitcoin development. For many traders, however, the performance of CEX clearly argues for the use of mainstream exchanges.

For beginners looking to join the crypto space, CEXs provide a simple and fast way to trade. DEXs, on the other hand, are more suited for experienced traders looking for privacy and complete control over their digital funds.

Author: Gate.io Researcher Peter L.
This article represents only the researcher's views and does not constitute any investment advice.
Gate.io reserves all rights to this article. Reposting the article will be permitted provided Gate.io is referenced.
In all other cases, legal action will be taken due to copyright infringement.

分享一下