Understanding DEXs vs. CEXs: A Technical Breakdown

Cryptocurrency exchanges are the backbone of trading for digital assets, yet there has been an unending debate over whether decentralized exchanges, or DEXs, are better than centralized exchanges, or CEXs.

In this post, I'm breaking it down-the differences between these two types of exchanges-so you can understand why one might be right for your trading needs.

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What Are Centralized Exchanges (CEXs)?

One of the most classic formats for crypto platforms is centralized exchanges, which make full use of the entire trading system operated by one company. The intermediaries are the ones that hold your funds and manage transactions on your behalf; some examples include the Binance, Coinbase, and Kraken exchanges.

Exactly like the old exchanges: they match buyers and sellers, process the orders, and hold assets in a central wallet. In other words, you're trusting the company that's behind it to handle your money, to execute trades, and to keep it safe when you are a user of a CEX.

This has its bright and dark sides. For one, CEXs are user friendly. They'll usually provide services like customer support, advanced charting tools, and high liquidity.

However, it's more liable to hacks, and users do not have control over their assets. Your funds could be held at risk if there's a hack on the exchange or a regulatory issue.

CEX holds your funds in custody and you need to trust the platform and its security measures,
Known for being user-friendly, with simple interfaces and high liquidity.

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Decentralized Exchanges (DEXs).

Decentralized exchanges are also quite different on the other hand. DEXs are, in reality, actually built on blockchain networks, such as the Ethereum eth network, through which users can trade directly with one & another through smart contracts. The known DEXs include Uniswap, SushiSwap, & PancakeSwap.

You are in total control of your assets, unlike central entities, as there is no central holding your assets for you with DEXs. As a result, since trades happen peer-to-peer, you will be directly interacting with the person on the other end of the trade, thereby cutting down on your reliance on trust since you are not handing over your funds to a third party.

The security aspect is where DEXs win big because there will not be any central organization holding the funds of the users, so the risk of a giant hack is much less. On the other hand, though, DEXs also bring along some disadvantages in the form of lower liquidity and a somewhat steeper learning curve.

It will sometimes still feel not so intuitive for a beginner to make a trade on a DEX, and fees can be relatively high at times, like when using Ethereum networks.

DEX allows self-custody, keeping all their assets in-house and reducing the reliance on third parties.
Trade is more complicated; there's less liquidity compared to CEXs.

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Which Do You Choose?

The choice between CEX or DEX lies on which you find more apt for your trading needs. A new user of cryptocurrencies, if you find ease, then you'd like to choose a CEX.

A higher liquidity is involved, and transactions are easily undertaken at the market price.

In addition, their interfaces are relatively more intuitive as they tend to offer live chat support and mobile apps among other features to make it easy when trading.

But if privacy and security are much needed, a DEX would better fit the bill. A DEX always lets you stay in control of your private keys and assets. You won't find a better option for those who have faith in the decentralized ethos of cryptocurrency.

Also, the DEXs do not need any KYC procedures so that you remain anonymous-value most traders seek.

Conclusion

The two, CEXs and DEXs, each have their strengths and weaknesses. Your choice depends on your priorities

. If it's ease of use and liquidity that you're after, a CEX might be the best. But if you want more control over your assets and privacy, then maybe a DEX is your way.

As such, it is very important that you understand these differences so you can make wise decisions in the crypto world.