The first time many people interact with crypto is through a cryptocurrency exchange. These platforms enable people to buy and sell crypto. In fact, they operate very similarly to stock exchanges. The only difference is that crypto exchanges deal in cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH).
There are two types of exchanges: centralized and decentralized. Both cater to different kinds of investors and come with advantages and drawbacks that investors should be aware of before trading.
In this guide, we’ll explore the differences between centralized (CEX) and decentralized (DEX) exchanges so you can make an informed investment decision.
What is a centralized exchange (CEX)?
A centralized crypto exchange is owned, operated, and managed by a single, for-profit entity. This company runs the exchange, settles disputes, and ensures that all transactions are processed smoothly.
Since CEXs are business ventures, the companies behind them provide a wide range of services to elevate customer satisfaction and great user experience, including:
- Allowing the purchase of cryptocurrencies against fiat currencies.
- Featuring a wide variety of trading pairs (Ex. Bitcoin to Ethereum)
- Embedding a matchmaking algorithm inside an order book to regulate supply and demand while increasing liquidity.
Centralized exchanges have their own order books, meaning every transaction is recorded and validated. In addition, all data is processed through the company’s servers. CEXs also operate under tight regulatory supervision, ensuring that fraud and money laundering activities don’t occur.
Centralized exchanges charge fixed fees based on their in-house structure and your trading volume. With many CEXs on the market, you can choose the best platform with trading fees you’re comfortable with. The most widely recognized centralized exchanges include Binance, Kraken, Coinbase, Gemini, and Crypto.com.
Pros and cons of a CEX
- Security: Centralized exchanges invest tremendously in the security of their servers and platforms. Many enact security protocols, such as Know Your Customer (KYC), multi-factor authentication (MFA), and Anti-Money Laundering (AML).
- Ease of use: CEX platforms are designed to accommodate all kinds of investors, from beginners to seasoned traders. They boast intuitive user interfaces (UI) to help traders navigate and make transactions easily.
- High liquidity: Centralized exchanges work with liquidity partners (LPs) to streamline orders and keep transactions moving quickly. The high frequency of orders improves buyer confidence and increases market liquidity.
- Regulatory compliance: CEX platforms can be held accountable for ignoring crypto regulations in their jurisdictions. As such, many have a vested interest in complying with the latest crypto laws.
- Security risks: Despite massive investments in security, there is always a risk of malicious actors hacking into an exchange’s servers and compromising assets and sensitive data.
- Lack of privacy: Centralized exchanges commonly collect and store user data. This means a single authority can dictate how they use your private data.
What is a decentralized exchange (DEX)?
A decentralized exchange has some of the same features as a CEX platform. This includes an Automated Market Maker (AMM), security functions, a matching system, digital asset infrastructure, and an order book. DEX platforms are decentralized applications (dApp) that operate using blockchain technology.
No single authority controls a decentralized exchange. They operate using a peer-to-peer (P2P) transaction model that allows investors to trade with one another directly rather than through an intermediary.
To function without human intervention, DEX platforms rely on smart contracts. These are programs that execute whenever a condition is met. For example, smart contracts guide the matching system to streamline orders on platforms like Uniswap.
DEX platforms are nearly anonymous and need very little user data for transactions. No third parties impose regulations on the exchange, and users have complete control over their private keys to withdraw their earnings (as DEX platforms don’t have integrated hot wallets).
Pros and cons of a DEX
- User privacy: Decentralized exchanges don’t collect much user data. As such, you can have peace of mind knowing your data won’t be manipulated by unscrupulous corporations.
- Control over funds: Unlike centralized exchanges, DEX platforms don’t have integrated hot or cold wallets. You can use your own wallet and enjoy complete control over your funds.
- Lower risk of centralized control issues: Decentralized platforms don’t have any red tape or restrictions like CEX platforms. Users have more technical freedom to make P2P trades on their terms.
- Lower liquidity: Many DEX platforms don’t have solid liquidity pools, meaning there aren’t many opportunities to find crypto trading pairs and complete orders.
- User experience complexity: The average CEX platform invests heavily in designing a user-friendly front end. Many DEX platforms don’t have this feature and are difficult to navigate.
- Technical barriers: In being difficult to navigate, users face significant technical barriers if they’re not experienced with making P2P trades.
- Susceptible to bugs in smart contracts: This can result in irreversible losses, whereas in a CEX, the operator may sometimes be able to reverse losses.
- Impermanent losses: This is an issue with DEXs and can be difficult to understand and navigate, particularly for less savvy investors.
- Cybersecurity vulnerabilities: DEXs are more vulnerable to hacks and cyber attacks, which can result in the loss of funds.
CEX vs. DEX: Breaking down the differences
CEX and DEX platforms differ in many ways. Here are some of the core differences between the two exchanges:
Control and management
Centralized exchanges have an overall governance structure that’s pivotal for making company-wide decisions. With complete operational authority, they control every aspect of a CEX platform.
On the other hand, decentralized platforms aren’t governed by a single entity and operate on a blockchain.
Security and custody
Both CEX and DEX platforms are highly secure, but it’s important to understand that neither is hack-proof. Centralized platforms store user data and funds on their remote servers — which can be compromised. Similarly, DEXs have cybersecurity vulnerabilities that bad actors may be able to take advantage of.
In addition, decentralized platforms offer more freedom over crypto custody. They give users complete control over private keys, unlike CEX platforms.
User interface complexity
Centralized exchanges sport user-friendly interfaces, making it easy for anyone to buy and sell. In fact, many CEX platforms work just like mobile apps. If you’re confused, you can access their resource libraries to check up on guides, tutorials, and documentation.
Decentralized platforms offer nothing of the sort. Many of these platforms have thin front-end capabilities that cater more to experienced crypto traders.
Liquidity and volume
Centralized cryptocurrency exchanges usually have higher trading volumes than DEX platforms. Global CEX trading volumes are valued at billions of dollars every month.
Decentralized platforms also have high trading volumes, but these can fluctuate rapidly because of low liquidity and market volatility.
Decentralized platforms typically have lower trading fees than their competitors. Centralized exchanges dictate their fees based on trading volumes, liquidity, and internal business decisions.
On the other hand, DEX fees are set based mostly on supply and demand, or simply the available liquidity they have.
Which type of exchange is right for you?
Choosing the right crypto exchange will ultimately depend on various factors, like your crypto experience and preferences for privacy and security. If you’re looking for a safe and beginner-friendly option, a CEX platform may be ideal.
On the other hand, if you want more control over your privacy and funds, a DEX platform may be a better choice.
Begin your crypto exchange journey with ease through AlphaPoint
Knowing the differences between CEX and DEX is a key first step to providing the best services for your customers. But if your business is new to the crypto space and just starting its new crypto venture, it’s important to have the right resources.
This doesn’t have to mean hiring a team of expensive crypto consultants and software engineers. Instead, you can partner with AlphaPoint to offer crypto exchange services through our white-label solutions.
For over a decade, AlphaPoint has worked with businesses and governments around the world to help them expand their crypto offerings effectively and affordably. Today, our infrastructure powers millions of users, helping businesses leverage the impact of cryptocurrency as its popularity grows.
Request a demo today to learn more about how our white-label crypto solutions can benefit your customers — and your bottom line.