As cryptocurrency continues to grow, more and more people are getting involved in the crypto space and are looking for the best way to buy, sell and trade their digital assets. One of the first decisions a new crypto user have to make is choosing between a centralised exchange (CEX) and a decentralised exchange (DEX).
Both types of exchanges offer access to cryptocurrencies, but they operate in different ways, each coming with its own pros and cons.
In todays blog we are going to explore the differences between the two and which one may be right for you.
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What is an exchange?
To help you understand the difference, it will help to first understand what an exchange is in the world of cryptocurrency. An exchange is a platform that allows users to trade cryptocurrencies. If it helps, you can think of an exchange like a stock exchange, but for digital assets.
Whether you are looking for swap Bitcoin for Ethereum, convert your GBP into USDT or take the leap into the world of DeFi tokens, you will need an exchange to do it.
Centralised Exchanges.
Centralised crypto exchanges are by far the most common and easy to access. They are run by companies that provide a simple, user-friendly interface, good customer support and offer custodial services to their users. Some of the most well known examples of these centralised exchanges include Binance, Coinbase, Kraken and Crypto.com.
When you register for a centralised exchange, you have to go through something known as the Know Your Customer (KYC) process. This involves providing the exchange with personal information, such as photo ID. Once you have been verified by the exchange, you can deposit funds, make trade and even store your digital assets on the platform itself.
The main appeal of a centralised exchange is their ease of use and reliability. They offer their users fast trade executions, deep liquidity and a wide variety of cryptos to purchase. For new users, this is often the simplest way of getting you started.
You can easily link your bank account, buy crypto with a fiat currency (such as GBP) and begin trading within a matter of minutes. Centralised exchanges also offer features such as margin trading and the ability to stake your assets, all within one platform.
Centralised exchanges do have some drawbacks though. The biggest concern for crypto users is the custodial risk. When you store your cryptocurrency on a CEX, you don’t have control fo your private keys, instead the exchange does. This goes against the main, core idea of cryptocurrency, the idea of decentralisation and self-sovereignty. Over the years there have been several high-profile cases where an exchange has collapsed, such as FTX in 2022. If a CEX is hacked or goes bankrupt, you can lose access to all your digital assets.
Decentralised Exchanges.
Decentralised exchanges are platforms that allow users to trade crypto directly with one another, without the need for a middle man, unlike the CEX platforms. They operate on blockchain networks through the use of smart contracts, which automatically execute the trades when the correct conditions are met.
Popular DEX’s include Uniswap, SushiSwap, PancakeSwap and Curve.
One of the biggest advantages of DEX’s is that they are non-custodial. This means that the user retains full control of their assets and funds at all times. Any trade or purchases you choose to execute are done directly from your crypto wallet, such as Metamask or Trust Wallet. You do not need to hand over any personal information to use a DEX or go through any kind of verification process. This offers the users of DEX’s a level of privacy and security that cannot be matched by any of the centralised exchanges.
In general, DEX’s also offer users access to a much wider range of tokens, including many lesser known or newly launched projects that are yet to make it to the major CEX platforms. This has made the DEX platforms a favourite amount early crypto adopters and DeFi enthusiasts who want to join in new and upcoming opportunities before they hit the mainstream exchanges.
Much like the centralised exchanges though, decentralised exchanges also have their own set of drawbacks. They are not easy to understand for new users, with a typically more complex user interface, confusing wallet integrations and the need for the users to manage their own gas fees. Liquidity can also become an issue, especially for less known trading pairs which can result in slippage (where you end up paying more or getting less tokens than you expected).
Because all trades are irreversible and are managed by code, any mistakes that a user makes, like sending tokens to the wrong address or falling for a scam cannot be undone.
One of the biggest differences between centralised and decentralised exchanges is the regulation around them. Centralised exchanges are subject to national laws and regulations, while DEX’s are more often than not considered “borderless” and anonymous. This has lead to questions being raised about money laundering, tax complications and consumer protection.
Crypto Analyst’s Final Thoughts.
If you are new to cryptocurrency and are just getting started, the best option for now would be sticking with a centralised exchange. They are easy to use and have great support should you make a mistake in the beginning. One thing we would always recommend though, once you are done trading on a centralised exchange you should move your digital assets into a private wallet to avoid the risk of leaving your assets on the exchange.
If you are a more advanced crypto user, value your privacy above convenience and want full control over your funds, decentralised exchanges may be the way forward. They are more aligned with the core ideas of cryptocurrency and enable direct peer-to-peer trading. Always be sure to do your own research around any DEX before connecting your wallet to avoid any scams or phishing attempts.
Both exchange types play an important role in the crypto space. Understanding the differences between the two, along with the pros and cons will help you make smarter and safer decisions while you are on your crypto journey.