If you are contemplating the purchase or sale of cryptocurrency, your first port of call will likely be an exchange. These are the digital markets where the majority of cryptocurrency trading occurs. You may be familiar with CoinSpot, Binance, Kraken, Uniswap, and others. Most are centralised and have a business strategy comparable to established organisations such as the New York Stock Exchange. However, an increasing number are decentralising and fundamentally reshaping how exchanges function. Here, we provide a detailed comparison of centralised exchanges (CEX) vs. decentralised exchanges (DEX).
Centralised Exchange
As its name suggests, centralised cryptocurrency exchanges serve as an intermediary between buyers and sellers. Virtually all crypto transactions occur on centralised exchanges, which gives more trustworthiness.
These platforms let users trade cryptocurrencies for fiat currencies such as the US dollar or digital assets such as Bitcoin and Ethereum. They typically act as custodians, storing and protecting your funds, and as dependable brokers in transactions.
Decentralised Exchange
A decentralised exchange is an alternative to a centralised exchange in which no one body is responsible for the assets. Smart contracts and decentralised applications are used to automate transactions and trades, as opposed to conventional centralised exchanges.
Decentralised exchanges use AMM (Automated market maker) or traditional order book models. They enable consumers to retain control of their assets by executing crucial operations on the blockchain. Some of the most popular decentralised exchanges you can think of are Uniswap, DyDx and PancakeSwap.
Centralised vs Decentralised Exchange: A Comparison
Centralised vs Decentralised Exchange: Image: Bitmartblog
Now, let’s compare them in terms of functionality, security, crypto-asset diversity, liquidity, fees, and authority.
Features
In terms of functionality, centralised crypto exchanges have the edge over decentralised ones. Users can use margin trading, portfolio management features, and advanced order types to boost their trade.
On the other hand, customers of decentralised cryptocurrency exchanges have limited access to order types and cannot engage in margin trading (or equivalent services). Possibly, when more complex decentralised systems are introduced to the market, they will have more features.
Security
You can deposit your crypto in the exchange’s central wallet, which remains under the jurisdiction of the centralised organisation. Centralised exchanges also facilitate documentation and execution of crypto trades on internal systems.
However, if you lose money on a decentralised exchange, there is no recourse. Also, since you own your wallet, you cannot reset your password if you forget your seed phrase (a series of random words you have when setting up your wallet).
Crypto Asset Diversity
There are about 4,000 distinct cryptocurrencies on the market as of 2021. For an asset to be listed on a CEX, it must fulfil the following requirements:
- Trading activity
- Security criteria
- Regulatory requirements
What about decentralised trade? Anything may be listed on a DEX. This allows you to trade new, in-demand assets but also increases your risk. If you do not do thorough research, you may have worthless assets! One prominent example is PancakeSwap, where you can trade more than 3000 cryptocurrencies. However, many of those projects have committed to a rug pull, or the core dev team has moved on with other projects.
Liquidity
One of the most significant drawbacks of decentralised exchanges is that they have not achieved similar liquidity levels to centralised exchanges. Some DEXs have recently implemented a new liquidity mechanism to address this problem: Automated Market Makers (AMMs).
Despite its significant value proposition, the AMM model does not replace the accuracy and performance of centralised order books with centralised liquidity.
Fees
Decentralised exchanges may offer cheaper maker and taker fees for individual deals, but on-chain settlement generally results in higher total costs. For instance, if you wish to trade on a DEX, you must pay gas costs for stages such as authorising transactions, swapping tokens, and maybe wrapping tokens. In addition, if the DEX cannot fulfil your order at the required price and size, slippage may cost you money.
Meanwhile, centralised exchanges such as CoinSpot, Binance, Crypto.com and Swyftx earn money through transaction fees and commissions as a middleman between buyers and sellers. To learn more about their pros and cons, you can read our crypto exchange comparison section, where CoinSpot vs. Swyftx, CoinSpot vs. Coinbase, Swyft vs. Binance, etc., are compared head-by-head. Unlike peer-to-peer transactions, centralised exchanges charge transaction fees for their services and convenience. The CEXs’ fees for trading and withdrawals can be lower than the hefty gas fees. However, it’s advisable to opt for well-established centralised exchanges with a transparent fee scheme that’s worth your money. For instance, while Syftx fees are a bit complicated and higher than average, the fees you must pay on CoinSpot are very affordable. To know more about how CEXs charge fees, you can read the CoinSpot fees explained article.
Usability
In terms of usability, centralised exchanges are superior to decentralised ones. They are much simpler to use than decentralised exchanges. By delegating transactions to an intermediary and paying a small fee, users have convenient access to their funds . In addition, they have access to technologies such as mobile applications, which enable customers to see their assets on visually appealing platforms.
Compliance
Cryptocurrency and its facilitators have long faced regulatory difficulties. In addition, decentralised exchanges have been the topic of compliance-related controversy. Centralised exchanges have an advantage over decentralised exchanges since they adhere to legislation and comply with local regulatory authorities. Centralised exchanges maintain a KYC database as well as strict security measures.
Regulations
A majority of centralised exchanges are licensed and regulated by the government. In nations such as China, India, South Korea and Russia, crypto exchanges may be prohibited, so it is in the CEX’s best interest to adhere to the legislation. In contrast, governments and regulators have no direct control over decentralised exchanges.
Customer Service
Another shortcoming of a DEX is that it does not support customer service, so it is a nuisance when you encounter any issues. In that case, you have to go to the project’s Discord or Telegram to ask for support and often do not get an answer immediately, and occasionally not at all. Worse still, it is also possible that you will fall prey to a scam.
However, for a CEX, you can visit the website for the contact information. You don’t need to worry about scams as all the project information is public. In addition, you can get super-fast support (for example, CoinSpot has 24/7 customer support with very professional staff to help customers). You can read a detailed CoinSpot review to know more about their excellent features.
Decentralised Exchange Vs Centralised Exchange: Summary
Here is a brief comparison between centralised and decentralised crypto exchanges.
Feature |
Centralised Exchange |
Decentralised Exchange |
Ease of use |
User-friendly |
Complicated |
Security |
Risk of being hacked |
Risk of Smart Contract Exploit |
Features |
Variety of features |
Limited features |
Speed |
Instant |
The order needs to be confirmed on the blockchain |
Fees |
Charges standard fee |
Gas fees |
Trading volume |
High |
Lower |
Liquidity |
High |
Lower |
Regulations |
Easily regulated |
Complicated regulation |
Fiat payment |
Yes |
No |
Final Verdict
When determining the kind of exchange to use, two factors are decisive: If you are mainly concerned with usability and are uncomfortable being in complete charge of your wallet, a CEX is likely your best choice. A DEX is a way to go if your top priorities are fewer costs and more control over your assets.
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The following review is for informational purposes only and should not be construed as financial or investment advice. It is important to note that cryptocurrency is a highly volatile and speculative market, and there is no guarantee of profit or loss. This review is based on the author’s personal experience and research, and individual results may vary. The author is not affiliated with any of the exchanges mentioned in this review and does not receive compensation for their mention. It is recommended that readers conduct their own due diligence and consult with a financial advisor before making any investment decisions.
The information regarding performance may be different from the time of publication. Past performance does not guarantee future results. While we believe that all content was accurate at the time of posting, it is possible that some offers included in the content may no longer be valid.