Decentralized Finance, 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) platform, and the advantages and disadvantages of both.
What is an exchange platform?
Before we get into the analysis of the two types of exchange platforms, let’s start at the beginning – what is an exchange platform? Simply put, an exchange platform is where buyers and sellers of assets such as cryptocurrency meet. Before you can buy your first Bitcoin, you need to open an account on an exchange and deposit money into it.
Most exchange platforms will require you to go through a KYC or “Know Your Customers” process to avoid fraud or money laundering and to comply with regulations.
What is a CEX?
When you think of a trading platform, chances are it’s a centralized exchange trading 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 these 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.
The advantages 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. As an example, the volume recorded on Binance during the last 24 hours was 520 times greater than that recorded on Uniswap.
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.
Disadvantages of a CEX?
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.
Advantages 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.
Disadvantages of a DEX.
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.
Which one to choose?
The answer here is not a clear cut one—it depends entirely on your goals and preferences. If you are a beginner or if you prefer an exchange that is user friendly, we suggest a centralized trading platform such as Binance. Its interface is much easier to understand and use compared to a decentralized exchange such as Uniswap. Moreover, being the world’s largest crypto exchange, you can be sure that volume and liquidity are high.
On the other hand, if you do not wish to relinquish too much control such as: private keys to transact and custody of your capital, as well as having the access to the listing diversity of altcoins and above all, privacy and security, trading on DEX is your answer.
With a current market cap of $141.33B, the DeFi market is primed for exponential growth and trading on DEXs is the next big thing!
Getting started with trading on DEXs doesn’t have to be complex. In fact, Superbots simplify your trading with state-of-the-art algorithmic trading robots to help you execute buy and sell orders on full automation on DEX so that you do not have to. In other words, you don’t have to be a pro to trade like a pro! It’s algo trading on DeFi made easy!