Trading on a CEX vs. DEX. What’s the Difference and What Are the Risks?
Learn about the differences between trading crypto on a centralized and a decentralized exchange.
There are two types of exchanges in the crypto markets: centralized (CEX) and decentralized exchanges (DEX).
In this guide, we explore the differences between the two and what risks you need to be aware of when trading on each of these exchanges.
CEX vs. DEX: What’s the Difference?
Centralized exchanges (CEX), like Binance, 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.
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.
The main difference between centralized and decentralized exchanges is that the former has control over your funds while you are interacting on the trading venue while, with the latter, users retain control over the funds while trading.
But fund security is not the only difference between the two types of exchanges.
Let’s dive into the pros and cons of each exchange type to learn more about what each trading platform has to offer and how the two differ.
Centralized Exchange (CEX): Pros & Cons
While centralized exchanges are widely considered less secure than their decentralized counterparts because they store user funds, they come with an array of features and benefits that drive users towards them.
1. 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.
2. Fiat/Crypto and Crypto/Fiat Currency Conversions
Centralized exchanges typically support fiat to crypto on and off-ramps, meaning that they allow you to buy bitcoin with US dollars, for example.
3. 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.
4. 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.
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.
1. 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.
2. 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. A crypto wallet should be non-custodial. Going by the famous phrase “not your keys, not your coin,” it is safe to say CEX wallets create a security risk for traders and investors.
We have borne witness to several infamous crypto exchange hacks with exchanges losing billions of dollars over the years. As exchanges hold user funds, they are prime targets for cybercriminals looking to get their hands on cryptocurrency.
Decentralized Exchange (DEX): Pros & Cons
Decentralized exchanges have taken a substantial share in the crypto trading market as a result of increasing user-friendliness and growing understanding among crypto users about the importance of keeping control over one’s private keys.
Several features attract users to DEXs, including:
1. 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.
Decentralized exchanges are generally more secure than centralized exchanges for two reasons:
They are non-custodial: Hackers target exchanges to access the central database and extract users’ private keys and withdraw their funds. Since DEXs do not hold your private keys, hackers cannot get into your wallet.
No identity checks: No risk of leaking private user data.
3. 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.
While decentralized trading venues provide some substantial advantages over centralized exchanges, they also have drawbacks new crypto investors need to be aware of.
1. Limited Trading
DEXs are currently limited in functionality. Features like margin trades, limit orders, futures, options, etc., are typically unavailable.
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.
CEX vs. DEX: The Risks
Trading and investing in crypto carries risk regardless of which type of exchange you are using. However, the risks created by the two types of trading platforms differ.
Exchange hacks are a real threat to centralized exchange users who hold funds on exchanges. This has happened in the past and is likely to continue to happen, especially when using smaller exchanges.
CEXs are subject to financial regulations that may change overnight, creating a potential risk for funds held in your wallet. For example, in the case an exchange is under investigation, your funds may be temporarily frozen or, in extreme cases, even seized.
Centralized exchanges typically require you to verify your identity. In the case of a data breach, this may lead to your personal data ending up for sale on the dark web. In that case, you could become a target of hacking or scamming attempts or identity theft.
DEXs are non-custodial, which means only you have control over your funds. In the same vein, if you lose your wallet’s recovery phrase, you lose your crypto. This is why you must carefully store your key in a secure place.
Decentralized trading venues are built using smart contracts, which creates a certain degree of code risk. That means that if a trading platform’s code has bugs or vulnerabilities, it can be exploited and funds are lost. This, unfortunately, has happened a lot in the early days of the DeFi boom in 2020. To mitigate this risk, it is best to stick with leading DEXs.
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.
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.
Trust Wallet — a Unique Blend
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The market-leading multicurrency wallet also enables you to enter the world of DeFi, DApps, and NFTs using the in-app DApp Browser in a simple and secure manner.