The number of centralized cryptocurrency exchanges (CEX) has started to grow actively with the popularization of cryptocurrencies. However, today traders can choose between using centralized (CEX) or decentralized (DEX) cryptocurrency exchanges. To choose an exchange for trading, traders need to know the differences between them, including the advantages and disadvantages of each.
Contents:
- What is a centralized exchange (CEX)?
- How does a centralized exchange (CEX) work?
- Differences between centralized and decentralized exchanges
- CEX vs DEX: which is better?
What is a centralized exchange (CEX)?
A centralized cryptocurrency exchange (CEX) is a trading platform with centralized management, acting as an intermediary in cryptocurrency trading. The user's account, wallet, and personal data are fully controlled by the exchange. It also acts as a liquidity provider for the crypto assets it supports, taking on the role of a market maker.
Centralized cryptocurrency exchanges decide which tokens can be added for trading, as all crypto assets must be vetted before listing. They also provide investors and other parties access to transaction-related data for analysis, alongside other CEX services. Using multiple blockchains, CEXs have eliminated the need for an intermediary. This is because all transactions are carried out directly within the exchange through its own interface.
How does a centralized exchange (CEX) work?
Centralized exchanges receive orders from individual or institutional clients, and they typically match buy and sell orders at the same price. On the other hand, they can also act as market makers, providing liquidity to tokens supported on their platform. Since these exchanges manage all the data of placed orders, they can also provide this information to market participants for analysis.
Crypto CEX can be used as a wallet for storing cryptocurrencies, as they support a large number of crypto assets. A very important characteristic of centralized exchanges is regulation. As these institutions handle billions of dollars and serve millions of clients from around the world, they are typically required to obtain permission to provide their services from local authorities in the countries where they operate.
These exchanges must also comply with numerous laws and regulations, including protocols:
- KYC - "Know Your Customer" identification of users,
- AML - Anti-Money Laundering protocol,
- CFT - Counter-Terrorism Financing protocol.
Additionally, these exchanges must ensure that all operations are carried out transparently and promptly, adhering to certain procedures that prevent market participants from distorting asset values.
According to recent reports published by Block, it can be concluded that in August 2021, the volume of spot trading on DEX exchanges accounted for 8.11%. This figure indicates that CEXs still account for 91.8% of the cryptocurrency market trading volume.
Differences Between Centralized and Decentralized Exchanges.
Decentralized cryptocurrency exchanges (DEX) emerged as part of the decentralized finance (DeFi) movement. Unlike CEX, decentralized exchanges are peer-to-peer trading platforms without a central managing authority.
Key differences between the two types of exchanges:
| Parameter | Centralized Exchange (CEX) | Decentralized Exchange (DEX) |
|---|---|---|
| Trading | Exchanges through CEX are conducted through the exchange's systems, which match buy and sell orders at the same price. | Exchanges are executed automatically based on parameters set by smart contracts, facilitating the exchange. |
| Data Storage | Stores data on its servers. | Transactions are recorded on the blockchain and can be viewed by anyone who knows how to access data in the network. |
| Liquidity | A market maker on a centralized exchange provides liquidity, ensuring all orders are executed quickly. | Uses Automated Market Maker (AMM) protocols, relying on token pools provided by third parties. |
| Fees | CEX charge fees for exchanges and withdrawals of crypto assets. | Transaction fees are typically lower since DEX operates through the blockchain. |
| Exchange Speed | Ensures fast execution times with advanced infrastructure and expensive servers. | May have slower execution due to the blockchain's current processing speed limitations. |
| Anonymity | Legally required to collect and store client information. | Offers significant anonymity as user data is encrypted on the blockchain and limited to the wallet address. |
Another significant difference between CEX and DEX is that decentralized exchanges use smart contracts and complex market-making protocols to ensure sufficient liquidity, so all orders are executed quickly. One example of such a protocol is Automated Market Maker (AMM). Instead of using a traditional order book, as is the case with centralized exchanges, asset prices on DEX are determined in accordance with the pricing algorithm.
CEX vs DEX: Which is Better?
You should choose which type of cryptocurrency exchange suits you best.
Each has its advantages and disadvantages:
- Centralized exchanges are regulated organizations that provide a higher degree of security and transparency, as they are required to operate within strict laws aimed at protecting investors and all other stakeholders.
- Execution speed is also typically higher for CEX.
- Centralized exchanges have higher liquidity.
- Decentralized exchanges offer lower fees, anonymity for participants, and direct access to relevant transaction data through the blockchain.
It is quite possible that as decentralized exchanges develop and solve scalability problems, centralized exchanges will eventually be replaced by their decentralized counterparts. The likelihood of this happening is a subject of ongoing debate — it's best to follow the development of blockchains to see if they have not improved to the point where centralized exchanges become obsolete. But at the moment, centralized exchanges occupy a large part of the crypto market, and they account for the overwhelming majority of all cryptocurrency trading volume.
