The exchange format of cryptocurrency revolves around two major sectors, which are centralized and decentralized exchanges. This article discusses what a decentralized exchange entails and what a centralized exchange is. Let's go ahead to discuss CEX vs DEX.
Concept of Centralization
The concept of centralization in the phrase "centralized cryptocurrency exchange" alludes to using a middleman or third party to facilitate cryptocurrency transactions. This middleman is trusted to handle the assets of both buyers and sellers. In a bank setting, where a consumer trusts the bank to hold their money, this is typical. It facilitates the buying and selling of digital assets such as Bitcoin and Ethereum, fiat currencies, cryptocurrencies, and the US Dollar.
This system is in place because banks provide security and surveillance services that individuals cannot obtain independently. The same idea holds for centralized cryptocurrency exchanges.
Transactors have confidence in the exchange to not only successfully conduct their transactions but also to utilize the network of other users to locate trading partners. The services of a centralized exchange come with the security of cryptocurrencies and improve a user’s experience with a wide range of services.
By "clearing" trades, centralized cryptocurrency exchanges actively participate in markets. Digital order books, which are lists of open buy and sell orders with volumes and prices, are commonly kept by them. They connect buyers and sellers and publish market prices based on the most recent selling price of an object.
Concept of Decentralization
Decentralized exchanges, often known as DEXs, are independent decentralized programs that let cryptocurrency buyers and sellers trade without ceding custody of their funds to an intermediary or custodian.
Smart contracts and order book relaying are two prevalent ways of conducting business, while there are many additional versions and levels of decentralization available.
Decentralized finance, a subset of blockchain technology and FinTech, has given rise to decentralized exchanges and alternative payment ecosystems with new protocols for financial transactions. DEXs are non-custodial and use the functionality of self-executing smart contracts for peer-to-peer trading, while users retain control of their private keys and funds, in contrast to centralized cryptocurrency exchanges, such as Coinbase, or Binance, which use order books to match buyers and sellers on the open market and keep crypto assets in an exchange-based wallet.
However, if a person wants complete control over their cryptocurrency and to investigate the newest options, a DEX may be their only choice.
You don't need to register for a DEX account, unlike a CEX. Instead, you access the online DEX software and link your cryptocurrency wallet. The DEX will attempt to complete your order automatically when you purchase or sell cryptocurrency.
CEX vs DEX
- Custodial and non-custodial
A centralized exchange is said to be custodial, while a decentralized exchange is non-custodial.
Since a DEX does not function as a centralized entity, there is no platform into which you may deposit money; instead, you connect the DEX to your current wallet and manage your money using your private keys.
The fact that centralized exchanges are custodial is one of their most important distinguishing qualities. Why does this matter? It entails keeping your money in an exchange-linked wallet rather than your wallet when you want to trade on a CEX. What matters is that the exchange holds the wallet's private keys, not you; instead, you receive login information for the platform.
- Transaction Speed
On DEXs, order processing can be complex. This is because trading calls must be processed before they are broadcast to the network and verified by miners. Due to fluctuations in the values of the cryptocurrencies being swapped, trades on DEXs are more prone to experience "price slippage," in which the transaction fails to execute. However, a centralized exchange tends to have a faster rate in its processing. This is usually because they have a lot of bodies to run their operations successfully.
- The Trading Volumes
Currently, the functionality of DEXs is constrained. Features like limit orders, futures, options, and margin transactions are unavailable. The major features are staking, buying, selling, and mining cryptocurrencies.
However, considering a centralized exchange, beyond only exchanging one digital asset for another, CEXs offer a wide range of additional capabilities, including margin trading, crypto derivatives trading, exchange staking, and margin lending, among others. This benefit attracts more traders who would love to explore different sides of cryptocurrency.
- CEX vs DEX Ease of use
Centralized Exchanges are more user-friendly and considerably simpler to utilize. They also provide extra possibilities for trading and investing. The users don't have to worry about creating wallets or connecting them to exchanges because they maintain the wallets and private keys. The officials of the exchange platform provide every need.
Decentralized Exchanges, on the other hand, only provide a small number of options through their user interfaces. Trading through DEX is also significantly more difficult for novice traders.
- Rules and Regulations
The majority of centralized exchanges are governed and licensed by the government. It may be against the law to operate a cryptocurrency exchange in some nations, such as China, South Korea, the USA, India, and Russia. Thus, CEX should abide by the rules in those nations.
On the other hand, governments and regulators have no impact on decentralized exchanges. Simply put, they can't be turned off. That is their greatest benefit, as customer support is not on their side.
Even though DEXs have recently experienced a surge in popularity, they have also been linked to several regulatory difficulties. How did decentralized exchanges suddenly gain popularity? The fact that decentralized exchanges have avoided some regulatory barriers makes the answer very clear.
- Anonymity
One of the primary benefits of trading on a DEX is anonymity. No authentication process, Know-your-customer (KYC), or personal papers are uploaded to foreign servers. Typically, all required to start trading is a personal address on the relevant blockchain. Between the exchange and authority, there is no interchange of personal information. Compared to a centralized exchange, there is no way your information is open to just yourself. The company has to know everything about your blockchain.
- Quicker transaction period
Speed is one factor that centralized exchanges have going for them. Compared to decentralized exchanges, they are quicker. A decentralized exchange takes 15 seconds to match and execute an order, compared to an average of 10 seconds for a centralized exchange to complete a transaction.
- Liquidity
The liquidity is greater on the centralized cryptocurrency exchanges. Users of these exchanges occasionally place orders after being swayed by current market conditions. As a result, numerous users purchase and then sell a highly sought-after asset. Market makers are another feature of these exchanges that contribute to the platform's increased liquidity.
Due to the lengthy order matching process, decentralized exchanges have poor liquidity. They have less known investors and market control. A lack of popularity can also cause low liquidity.
- Fees Involved
Depending on the nature of trades, centralized exchanges charge various fees and commissions. Some exchanges charge higher rates than others. For instance, you might anticipate 1 percent to 10 percent costs if you use a credit or debit card to purchase cryptocurrency. The rates for exchanging tokens and coins are the same. This makes sense given that these fees and commissions provide a portion of the income for such decentralized exchanges.
On the other hand, decentralized exchanges have nominal fees and commissions. This is so because outside parties do not govern decentralized exchanges. Users won't have to pay intermediaries any pointless fees as a result.
Conclusion
Coin trading is permitted on both CEX and DEX, although they go about it differently. Comparing CEX vs DEX, CEX relies on centralized corporations that function as a mediator between users while DEXes use smart contracts to execute trades. While decentralized exchanges only give users the means to trade and assume users understand what they are doing, centralized exchanges will, to some extent, offer a safety net for consumers and are relatively newcomer-friendly.
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