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DEX vs CEX… Which one is better?

When it comes to buying and selling digital assets, we ask ourselves which is the best option to do so? A centralized exchange (CEX), or a decentralized one (DEX). The answer to this question may vary according to your needs.

Below we will explain in more detail...

The key difference between a centralized and a decentralized exchange is in how the funds are stored.

DEXs are not governed by a central authority, they operate through smart contracts on a blockchain.

When we make an exchange in this type of exchange, the price that tells us to buy or sell some crypto is determined automatically. To interact with this type of exchange, you must connect your wallet with the DEX and you can operate, you do not need to be registered or verified.

On the other hand, CEXs are controlled by a company that works as an intermediary between the buyer and the seller, they are based on an order book, which users can see.

These two features make it easier for the user to identify the "last realized price". In this type of exchange you must register and verify your identity. The funds are managed by the company, but you can withdraw or spend them whenever you want. 

Some centralized exchanges are Binance, Huobi, FTX or Kucoin.

Chainalysis presents in a report made in 2021, that the number of decentralized exchanges (DEX) is growing faster than all other types of cryptocurrency exchanges.

How are DEXs different from CEXs?

Well, in the absence of a central authority that controls an order book and collates orders, DEXs have had to devise a different approach to facilitate price discovery.

This was made possible by a novel and innovative mechanism known today as the automated market maker (AMM) model. Uniswap was the first DEX to use the AMM model, followed by PancakeSwap. 

AMM DEXs can operate because of an underlying liquidity pool that is made available for each trading pair. For example, an ETH-USDC trading pair on a decentralized Exchange would have an underlying liquidity pool with ETH and USDC tokens.

The total amount of tokens within the liquidity pool represents, as the name implies, the total amount of liquidity for the trading pair, similar to how the depth of the order book would be considered on a centralized Exchange.

How are prices determined?

In a DEX, the current market price of a trading pair is the ratio of the number of tokens in its liquidity pool. For example, if the current market price of ETH is $3,000, then within the ETH-USDC liquidity pool, the ETH - USDC ratio should be 1 - 3,000 (i.e. for every 1 ETH, there should be 3,000 USDC in the pool).

CEXs operate like traditional stock markets, based on an order book. Think of them as an open market with a central authority that connects buyers and sellers. 

In a CEX, it is normal for all users to be able to see the entire order book (i.e. all the buy and sell orders that occur on the exchange). These two features make it easier for the user to identify the "last realized price". In exchange for this, the exchange takes a small share of each trade. 

Advantages of a DEX

  • These types of exchanges, being decentralized, are not regulated or monitored by the government. 
  • Users trade directly with each other, i.e. there is no third party involved, so they can keep their keys and cryptoassets private.
  • Identity protection is key in this type of exchange, as users must not send any type of document, nor give any type of personal information, they must not perform authentication procedures or KYC. 
  • DSince a DEX resides directly on the blockchain, it cannot target an attack on a central server.

Advantages of a CEX

  • The interfaces of these exchanges are user-friendly and easy to understand. 
  • Transactions are carried out quickly and easily. 
  • Due to the high volume of transactions and constant movements, there is sufficient liquidity. 
  • They allow for near real-time trading. 
  • The algorithms of the main stock exchanges can process thousands of orders per second.

Would you like to maximize the benefits of the crypto ecosystem? Remember that if you have a business, you can receive payments in cryptocurrencies with Pluto Crypto POSIn addition, you can manage your assets, send and diversify your portfolio easily and intuitively in PlutoWallet.

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@spartanhill

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