In recent years, there has also been a rise in decentralised exchanges (DEXs). DEXs offer the same products and services as CEXs, except they offer it on a decentralised and transparent blockchain rather than on a private centralised server.
In this guide we’ll take a look at both centralised exchanges and decentralised exchanges and evaluate how they differ from one another.
Centralised Exchange (CEX)
Centralised exchanges (CEXs) are trading platforms or marketplaces that are owned and operated by corporate organisations. As such, centralised exchanges act as a “middle man” between buyers and sellers of digital assets such as cryptocurrencies.
Users of a centralised exchange trust the exchange to conduct buy and sell orders on their behalf and secure their digital assets.
Benefits of a Centralised Exchange (CEX)
The onboarding process of CEXs is generally simple, which appeals to everyone, ranging from beginners to professionals.
Another benefit of CEXs is that your digital assets are safely stored in a custodial wallet and support is offered in case of loss of funds (for the most part).
CEXs also boast the largest pool of traders and users. In turn, this gives CEXs the biggest cash flow and the largest amounts of liquidity. This enables CEXs to transact orders of larger sizes, at any time.
Disadvantages of a Centralised Exchange (CEX)
- Restrictions & Limitations
Some CEXs have been banned or restricted in particular countries or regions. Also, some CEXs are known for the limited amount of digital assets they offer.
CEXs are opaque. There is no way to easily verify the number of assets held, the number of liabilities faced and the overall health of CEXs. In the same context, it’s difficult to assess if CEXs have made undisclosed deals with specific market makers and power users.
- Custodial Wallet
Your digital assets on a CEX are stored in a custodial wallet. This means the CEX has control over your digital assets and could even freeze these or deplatform you if they see the need to do so. If the CEX faces an insolvency event, users’ digital assets will belong to the CEX and users will need to join a long line of creditors in the ensuing insolvency proceedings.
For more on the disadvantages of centralised entities, read our Web2 vs. Web3 guide.
Decentralised Exchange (DEX)
Decentralised exchanges (DEXs) are trading platforms or marketplaces that are not owned by centralised/corporate organisations.
DEXs are, as the name suggests, decentralised and permissionless and are most commonly found on blockchains such as Ethereum and Solana.
There are generally 2 types of decentralised exchanges worth noting: Orderbook-based DEXs and AMM-based DEXs.
- Orderbook-Based DEX
An orderbook-based DEX is a platform that uses a more traditional central limit order book (CLOB) system for its trading infrastructure.
- AMM-based DEX
An AMM-based DEX is a platform that uses Automated Market Makers (AMM) for its trading infrastructure. AMMs generally work based on algorithms and mathematical formulas.
Benefits of a Decentralised Exchange (DEX)
Anyone, from anywhere in the world, can freely access and participate in a DEX. DEXs are also accessed with non-custodial wallets, meaning that you custody all the assets you use on the DEX.
For more on this, read our Best Solana Wallets guide.
DEXs are built on public blockchains. This means that all transactions are immutable and publicly available. Every user can see the number of total deposits, daily transactions, volume traded etc. by parsing on chain data. Additionally, if the code is open sourced, any user can verify the fairness and integrity of the protocol.
Typically, DEXs offer a significantly wider selection of digital assets than CEXs. If you’re scouting niche products, a DEX is more likely to have what you’re looking for compared to a CEX.
Disadvantages of a Decentralised Exchange (DEX)
In order to use DEXs, you need to set up and learn how to use a non-custodial wallet. This initial step and its learning curve can prove to be difficult for some people, especially beginners.
As DEXs aim to be less regulated compared to CEXs, there may be fewer protections in place for users. This means that users should do their due diligence prior to trading.
- Network Congestion
As mentioned previously, DEXs run on blockchains such as Solana. During periods of high traffic, certain blockchains are susceptible to network congestion. In turn, this may affect trades on the DEX themselves.
We hope our guide helped you in understanding the differences between centralised exchanges (CEXs) and decentralised exchanges (DEXs).
Remember, using DeFi can be risky!
Disclaimer: This guide is strictly for educational purposes only and doesn’t constitute financial or legal advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.
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