DEX vs CEX
When it comes to cryptocurrency exchanges, there are two main types: centralized exchanges (CEX) and decentralized exchanges (DEX). While both allow users to trade cryptocurrencies, they have significant differences in terms of how they operate, the level of control users have, and the risks involved. Let's take a closer look at the differences between DEX and CEX. Centralized Exchanges
Centralized exchanges (CEX) are operated by a central authority, such as a company or corporation. They are the most common type of exchange and are similar to traditional stock exchanges. In a CEX, users deposit their funds into the exchange's wallet, and the exchange facilitates trades between buyers and sellers.
One of the main advantages of a CEX is that they tend to have a higher trading volume, which means that users can often buy or sell cryptocurrencies at a more favorable price. They also typically offer a wider range of trading pairs and have more advanced trading tools. Another benefit is that CEX has offramp services, which means that users can sell their crypto assets for fiat and withdraw the money to a previously verified bank account. Ultimately, a CEX is a good place for someone new to Web3 to begin, as the process is easy and the wallet is custodied, so there is less place for losses due to user inexperience.
However, the downside of a CEX is that users have to trust the exchange to hold their funds and execute trades fairly. If an exchange is hacked or goes bankrupt, users' funds can be lost or stolen. Additionally, CEXs are often subject to regulatory scrutiny, and users may need to provide personal information and go through a KYC (know your customer) process to use them, as well as to register payment and withdrawal methods. Decentralized Exchanges
Decentralized exchanges operate without a central authority, meaning that users have more control over their funds and trades. They are built on blockchain technology and use smart contracts to execute trades. In a DEX, users connect their cryptocurrency wallets to the exchange and trade directly with other users.
One of the main advantages of a DEX is that users have full control over their funds and private keys, which reduces the risk of theft or hacking. Additionally, users do not need to go through a KYC process to use a DEX, which provides greater privacy.
However, DEXs tend to have a lower trading volume than CEXs, which can result in less liquidity and higher trading fees. They also typically have a more limited range of trading pairs and less advanced trading tools.
Another potential downside of a DEX is that trades can be slower to execute due to the time required to confirm transactions on the blockchain. Additionally, if a user makes a mistake when entering a trade, there is no central authority to reverse or correct the transaction, and unlike the centralized exchanges, users cannot directly withdraw their funds to fiat.Read more in Part 2 of the SORAMITSU Developer Diaries, available next week.