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Arnaud Deblander
Jul 15, 2022 7:00 AM

CEX vs DEX: What are the advantages and risks?

Decentralized Finance (DeFi), trading on centralized exchange platforms (CEX) versus decentralized exchanges (DEX) and the list goes on. Given that the ideology of Bitcoin and cryptos is decentralization, how do you cut through the noises and find your way through all these terminologies?

Today we will focus on the differences between a centralized exchange (CEX) and a decentralized exchange (DEX) platforms, the advantages and disadvantages of both as well as the risks involved. 

Given the recent rumour of Kucoin and founder of crypto exchange FTX, Sam Bankman-Fried’s statement: “some third-tier exchanges are already secretly insolvent”—are centralized exchanges safe? Are DEXs the answer moving forward? 

What is a CEX?

When you think of a trading platform, chances are it's a centralized exchange trading platform. To put it simply, when you buy crypto from a centralized exchange, you set up a wallet to facilitate the transactions and this wallet is housed on the exchange’s platform. For example, Binance, which is the most widely used exchange in the world, is a CEX. 

As mentioned above, CEX trading platforms are characterized by a relatively high KYC requirement. In order to access certain services or to be able to withdraw a higher amount, you need to pass this KYC. Last summer, Binance restricted the use of its API service to members with at least, intermediate accreditation.

The purpose of the centralized platforms is to connect buyers and sellers via the orderbook and during the process, as long as you are trading on their platforms, your funds are on the platform.

What is a DEX?

Decentralized exchanges, also known as DEXs, are digital platforms that function like traditional exchanges. But, unlike traditional exchanges, at the center of the service operates a smart contract. This eliminates intermediaries to a large extent, making them more secure and transparent. In simple terms, a decentralized exchange, or DEX, is a cryptocurrency exchange operated by smart contracts.

Pros and cons of a CEX?

The trading volume on a centralized trading platform is usually much higher than on DEX. This reduces the risk of slippage and allows the use of more funds.

There are generally more services available on a CEX than on a DEX, the main example being derivatives trading. The ability to buy cryptos with fiat currencies is also a definite advantage.

Depending on the size of the platform and its security level, there is a risk of hacking. In addition, your funds are on the platform, which further increases the risk.

Pros and cons of a DEX.

The main difference with a CEX is the absence of KYC, the only thing you have to do if you want to trade on a DEX is to connect your wallet, the easiest being Metamask. So you can keep your anonymity by using a DEX.

The other good thing is that your funds stay on your wallet, unlike a centralized exchange where all funds are on the platform.

DEXs are also at the center of DeFi and NFTs, although the big CEX exchange platforms are starting to get into it too.

The trading pairs you can trade on are limited compared to an exchange like Binance. Also, the execution time of trades and therefore the efficiency will often be less than on a centralized platform.

What are the associated risks?

This is possibly one of the most discussed subjects of late, with the crisis in DeFi and rumours of centralized exchanges. 

When trading on a centralized exchange platform, the fact that the funds are held by the exchange can be risky. Indeed, you do not hold your cryptos and they are potentially at risk if the exchange was to be hacked. 

This depends mainly on the size and importance of the exchange, even if nothing is impossible, an exchange platform like Binance runs less risk than a smaller one.

In addition, there is also the possibility of the centralized exchanges freezing withdrawals and deposits due to various reasons. 

On a DeFi protocol you keep your cryptos yourself on a wallet like metamask for example, but the latter can also be hacked.

Flash loan attacks are also problematic because they can make you lose your capital in no time if the protocol has a flaw. Finally, there is also a risk of stablecoin, as we have seen with Terra USD, a de-peg against the USD.

On top of that, with DeFi, with great freedom, comes great responsibility. Since you have full ownership over your assets and funds, there is a chance that with a wallet such as Metamask, if you were to lose your seed phrases, there is no chance of recovery. Your key, your cryptos and most definitely, your full responsibility! 

Which one to choose?

It depends a bit on your personal preferences! If you prefer to remain anonymous and not deposit your funds on an exchange platform, then choosing a DEX will be the wisest choice. If on the other hand you don't mind some KYC, you can go for a centralized exchange platform.

You can also decide to use an automated trading solution like SuperBots. Indeed, for newcomers to the market, decentralized trading platforms may seem complicated but SuperBots is the key to cut through the complications! 

SuperBots is the first and only automatic algorithms trading protocol that trades automatically on DEXs. Each vault on SuperBots represents an algorithm and consists of a trading pair. These vaults are powered by smart contracts and they help you take care of everything on full automation—from trading, to conversion of tokens for trading, payment of performance and trading fees and more.

Users just need to deposit their capital (in either the base or quote of the trading pair) into the vaults and the vaults will take care of the rest! 

Besides being easy to use, the other benefits of SuperBots are that it is a performance fee based model. There is no subscription fee! Users only pay a performance fee of 15% when the trades are in profit! If there is no profit, there is no fee! This means the onus is on us to only provide you with the best performing algos that continue to perform superbly not just during the bull market but also the bear market! Between April to June 2022, when the overall crypto market tanked, the top 4 best performing Superbots made a total of +80%! This is fully transparent and the trade by trade and performance history can be checked here.

Conclusion

The best thing about the crypto market is that you don't have to be 100% sure which way to go. You can very well use part of your funds on a centralized exchange platform, another part in staking and the rest on one of the SuperBots vaults!

Anyway, diversification is the key word and as the golden rule in investing goes - never put 100% of your capital in one place!