There are two types of exchanges in the cryptocurrency markets: centralized (CEX) and decentralized (DEX).
In this guide, we will explain what a cryptocurrency exchange can be, explore the differences between them, and what risks you need to consider when trading on each of these exchanges.
CEX vs. DEX: what’s the difference?
Centralized exchanges (CEX), such as Binance, are online trading platforms that match buyers and sellers through an order book. Essentially, they work the same way as online brokerage accounts, which is why they are so popular among investors.
Decentralized exchanges (DEX), such as PancakeSwap or Uniswap, are autonomous financial protocols running on smart contracts that allow crypto traders to convert one digital asset into another, with all transactions displayed on the blockchain.
The main difference between centralized and decentralized exchanges is that the former controls your funds while you interact on the trading platform, while the latter allows users to retain control of their funds during trading.
But fund security isn’t the only difference between the two types of exchanges.
Let’s dive into the pros and cons of each type of exchange to learn more about what each trading platform has to offer and how they differ.
What is a centralized exchange (CEX): pros and cons
Although centralized exchanges are considered less secure than their decentralized counterparts because they store investors’ funds, they offer a number of features and advantages that attract users.
Pros
- Trading volumes
Centralized exchanges are usually very liquid. Binance, for example, regularly records daily trading volumes of over $30 billion. For beginners, these active platforms essentially guarantee the smooth exchange of their assets at any time. For experienced traders, CEXs provide a way to transfer relatively large amounts of funds in and out in a matter of minutes.
- Fiat/crypto and crypto/fiat currency conversion
Centralized exchanges typically support the inclusion and exclusion of fiat cryptocurrency. This means that they allow you to buy Bitcoin, for example, with US dollars.
- More features
In addition to the vast number of digital assets supported by CEXs, they offer many more features beyond exchanging one asset for another, such as margin trading, cryptocurrency derivatives trading, exchange staking, and margin lending, among others.
- Ease of use
One of the attractive features of most CEXs is their user interface. Considering that most beginners are unfamiliar with crypto pairs or simple terms such as “long or short,” CEXs do an excellent job of guiding users into the crypto space. Some CEX platforms, such as Binance, have simplified versions for users who want to make basic trades. Moreover, they function almost like online brokers, thus acting as a familiar face to traditional investors.
Cons
Although centralized trading platforms have many advantages for investors who are accustomed to their online brokerage accounts, they have a number of significant disadvantages.
- Strict Know Your Customer (KYC) policies
For users who want to maintain privacy while trading, CEX is not a suitable exchange. Centralized exchanges are subject to strict KYC policies. They typically require you to upload a photo of your face and valid ID in order to buy and sell cryptocurrency or withdraw funds.
- Not your keys, not your coins
While CEXs provide easy trading, high liquidity, etc., they provide you with wallets, which means they have power over your cryptocurrency. A crypto wallet should not be controlled by a third party. Using the famous phrase “not your keys, not your coin,” it is safe to say that CEX wallets pose a security risk to traders and investors.
- Hacking
In recent years, we have witnessed several infamous hacks of crypto exchanges, resulting in billions of dollars in losses. Since exchanges centrally store user funds, they are prime targets for cybercriminals seeking to obtain cryptocurrency.
