We all want to feel peace of mind regarding the safety of our crypto money. We all want to have it in a safe place where no one can access it, and when carrying out a commercial operation, we don’t want to take the risk of someone scamming us. Crypto exchanges or “exchange houses” focused on cryptocurrencies, emerged as a response to these needs in the crypto world.
Today, crypto exchanges are mainly classified into two types: Centralized Exchanges (CEX) and Decentralized Exchanges (DEX). Each one has its strengths and weaknesses. As the crypto world expands, new exchanges appear, whether one type or another. With so many options available, it can be difficult to discern which is the best option to meet your needs.
In this guide, we’ll try to clarify how each type of exchange works and what are its advantages and disadvantages, but we’ll also give you some guidance, so that you can more easily decide what option is best for you. Let’s get started.
What is exactly an exchange and how does it work?
In case you are a beginner in this matter, we’ll start with the most basic topic: a crypto exchange is a platform that allows its users the trading of digital assets.
The immediate objective of these platforms is to provide the necessary tools so that users can exchange cryptocurrencies and other financial assets with each other.
Although each exchange may have its particular procedures, in general, they all follow a similar way of working:
Registration on the platform
A user registers on the platform with the data they request. Some exchanges ask for a fairly large list of requirements, while others will only ask for a username and email. Also, some exchanges may apply “know your costumer” (KYC) policies to determine if a customer is eligible for the service.
Deposit of funds
Once you have signed up, you can fund directly into cryptocurrency eWallets or using fiat money — if the exchange allows it. The payment methods will depend on the exchange.
The most interesting part: trading by taking one base currency to get another. The most popular markets are Bitcoin, Ethereum, USD and EUR.
Withdraw your money
You can withdraw the money you invested and convert it to fiat money again. You can make the withdrawal to your bank account or another payment platform, depending on the exchange.
A bit of history about exchanges
Actually, the cryptocurrency trading that we know today is relatively new. The first transaction in history was made by Satoshi Nakamoto in early 2009 when he sent a few Bitcoin to Hal Finney.
A year later, the first Bitcoin exchange would appear, Mt.Gox, on which enthusiasts could carry out exchange operations. However, Mt.Gox went bankrupt in 2014 due to a cyber attack where more than 700,000 BTC were lost.
Even with all this, people didn’t lose their enthusiasm and some time later a new exchange called Coinbase appeared, which is now one of the main CEX-like exchange platforms.
After the success of Coinbase, more centralized exchanges continued to appear trying to ride the cryptocurrency wave, and it remained that way for a some years.
It was only when the first decentralized financial applications (DeFi) appeared, that decentralized exchanges such as Uniswap, Sushiswap and Bancor began to take a greater role on the stage.
What is a Centralized Exchange (CEX)?
A CEX is a centralized exchange platform where each transaction goes through a central authority — a company with a CEO and employees — that controls operations on the platform. Today, the vast majority of platforms are of the CEX type.
This types of exchanges benefit by charging a commission for each transaction, although they may also have other additional ways of generating income.
A CEX, in addition to providing an exchange platform, many times also offer analysis and security tools for transactions.
We can say that CEXs work in a similar way to traditional stock exchanges, only that they trade cryptocurrencies instead of stocks.
- There is an intermediary for transactions
- They allow transactions in Fiat currency (ideal for Forex traders)
- Records are temporarily stored in a database
- Nodes aren’t update in real time – this improves speed
- The liquidity on the platform is higher
- Use of KYC and Anti-Money Laundering (AML) policies
- They’re more prone to receive attacks in the system
What is a Decentralized Exchange (DEX)?
With the concepts of decentralization and P2P transactions, the foundations were laid for the creation of DEX or decentralized exchanges.
In this case, transactions take place directly between two users or operators. This eliminates the need for intermediaries, since the same operators establish the terms of negotiation.
Here there are no CEOs or employees, everything runs on blockchain technology and is controlled democratically among the users themselves.
For example, if you want to buy a currency like DAI using Bitcoin, you simply set an initial bid price and if someone agrees, the trade is done. You pay with Bitcoin and receive your DAI coins.
The main advantage of this type of exchange is that operations are carried out more quickly since there is less regulation, in addition to the fact that the commissions are usually lower.
However, if any issues occur, the exchange won’t be able to respond to traders in many cases as exchanges are person-to-person.
- Fiat currency transactions are not allowed
- The volume of transactions is usually lower
- The negotiation speed is lower due to the updating of nodes in real time
- Less liquidity on the platform
- KYC or AML policies don’t apply
- They don’t save private keys in their applications
CEX vs DEX: Advantages and disadvantages
Centralized exchanges (CEX) advantages
Greater ease of use
User interfaces are simpler and easier to use and master.
They usually have a wide variety of trading options and a greater variety of cryptocurrencies.
They have a higher volume of operations due to the beneficial intervention of the central authority, which ensures the security of transactions.
Higher operating speed
The algorithms of these platforms can process many more orders per second in real time. This allows traders to react to market changes more quickly.
Larger exchanges tend to offer a greater variety of digital currencies and a large number of registered users. They also support deposits and withdrawals in fiat currency.
Centralized exchanges (CEX) disadvantages
Less control of your money
Crypto assets are stored on the exchange, since the wallets are part of the platform.
The security of the private keys rests with the exchange, so there is a risk that you could lose all your money if an attack on the system occurs.
These exchanges are regulated by the laws of the country where their company is located. This is useful on the one hand to prevent money laundering, but on the other hand, operators collect a large amount of personal data from their users.
Decentralized exchanges (DEX) advantages
Decentralized exchanges are free from any type of limitation or regulation by any public or private entity. Trade between users is direct.
As a user, you’ve full access, control and responsibility over your private keys and your crypto assets.
In DEX, there is no type of authentication procedure or loading of identification documents. Your identity will remain anonymous, as there is no exchange of personal data between you and the platform.
Because operations are carried out through a decentralized network of servers, the risk of a hacker attack is minimal, as there is no central point to direct the attack. This likewise reduces inaccessibility problems due to server failures.
Decentralized exchanges (DEX) disadvantages
Lower operating speed
Trading on a DEX is usually slower as each transaction must be validated by other nodes. This can be a problem if you need to react quickly to changing market situations.
Right now, most traders are on centralized exchanges, as the concept of decentralized exchanges is relatively new. This means that liquidity is also lower.
DEX functions are still limited. User interfaces are still very complex for beginners and many functions are not available to all users.
CEX vs DEX: Which exchange model is best for you?
The answer to this question is very simple: it depends on your needs.
If you plan to participate in a cryptocurrency exchange, it’s important that you understand the difference between the two models and analyze what your immediate needs are.
Note that there are several factors to consider:
- Operating speed
- Ease of use
Consider that the advantages a CEX offers you today, could be a disadvantage tomorrow and vice versa. So, the recommendation is, that you consider both types of exchange based on the circumstances.
To help you make the best decision, consider the following:
Regarding security, although the security measures in CEX have now been greatly improved, DEX works much better, since the private keys aren’t part of the platform, while in CEX you could even recover your username.
With a DEX, you’ll have full control of your privacy, your private keys and therefore, your funds at all times. DEX is a good option if you only want to trade small amounts of crypto directly and don’t have much concern about sudden market changes.
In the case you’re interested in speed when carrying out operations, in this aspect CEX wins, since by working under the control of a central authority, offering greater volume and liquidity to carry out transactions, this significantly reduces the response time.
In this sense, CEX is the best option if what you’re looking for is a highly liquid platform that you can use to carry out speculation operations and obtain profits by observing market movements. The main problem with CEX is that you’ll always be dependent on the system, and you won’t have full control over your money either.
Therefore, here we have a well marked contrast, but nevertheless, there could be intermediate options.
At the present time, many CEX—type platforms are considering the advantages that decentralization offers — Binance case — while DEX platforms continue to gradually incorporate more and more CEX-specific options.
All this competition is taking both types of platforms to a point where they are becoming hybrids, which if analyzed well, could end up blurring the line that separates both types of exchanges.
The latter modality is most likely to be the norm in the near future…
CEX vs DEX: 6 Best Crypto Exchange Services in 2021
One of the most popular platforms worldwide to operate with all kinds of cryptocurrencies. It has the largest trade volume in the world and you can do everything, from trading, to staking and p2p.
It also has its DEX version at https://www.binance.org/
Another of the largest CEX exchange platforms out there. It has a lot of functions, and you can connect it directly with your bank account, although it also supports many other payment methods.
It’s the platform with the highest volume of transactions in Bitcoin. The company is headquartered in Taiwan and although it has suffered several millionaire attacks, it has responded to all its users, which shows its solidity and legitimacy in the market.
Uniswap is considered the best exchange platform in DeFi. It’s quite easy to use and has a large volume of transactions — and therefore, liquidity. Being a DEX platform, users can vote for changes to the platform democratically. It charges a trading fee of just 0.3% per exchange.
SushiSwap is the result of a fork on the UniSwap blockchain and is currently its main competitor. Today it has $ 3.06 billion in guaranteed assets and also offers unique features in the DEX environment that go beyond the exchange of crypto assets.
Bancor is a pioneering liquidity protocol in the DeFi ecosystem. It’s operated by the Swiss Bancor Foundation, has its own native token (BNT), and offers unique asset protection features for its users. It currently houses $ 844 million in guaranteed assets, which is a good indication of its credibility level.