Advantages of a DEX
A decentralized exchange is free from government requirements, regulations, or monitoring. Users face each other in direct trading, and there is no third party involved in the exchange. Each user has full access to their private keys and, therefore, their crypto assets.
Anonymity is certainly one of the main reasons for trading on a DEX. There is no authentication procedure, no KYC, and no personal documents uploaded to servers abroad. Usually, a personal address on the respective blockchain is enough, and trading can begin. There is no exchange of personal data between the exchange and an authority.
The generally low-cost trading with a large number of trading pairs takes place via a decentralized server network. This minimizes the risk of a hacker attack enormously and makes inaccessibility due to server failures virtually impossible. Since a DEX resides directly on the blockchain, it cannot target an attack on a central server.
Disadvantages of a DEX
Trading on a decentralized exchange is usually significantly slower than on the centralized variants. While this varies from DEX to DEX, each transaction must be validated by miners. When it is necessary to react to changing market situations at short notice, decentralized exchanges are hardly suitable as a suitable trading venue.
High liquidity is key to the success of an exchange. The exchanges with the highest liquidity are always among the most popular trading venues. The relatively fresh concept of decentralized exchanges means that there are significantly fewer traders than on CEX. As a result, liquidity is also significantly lower.
The functionality of DEX is still limited. Also, the graphical user interface is mostly too confusing for beginners. Limit orders, margin trades, or stop losses are not available for many traders. However, most decentralized exchanges are working on the way to adopt the functionalities known from CEX.
Advantages of CEX
The user interfaces are easy to understand even for beginners, and the processes and procedures can be internalized quickly. Easy and uncomplicated access to the respective trading options. Generally high level of functionality with various trading options and a wide range of cryptocurrencies.
Due to the high trading volume, CEX has high liquidity. The exchanges can meet payment obligations quickly and easily. The bustling activity on the centralized trading venues ensures many buy and sell orders to guarantee market-friendly trading.
CEX are based on an individual and central infrastructure. This enables fast transaction exchange almost in real-time. The algorithms of the leading exchanges can process thousands of orders per second. Traders can react to changing market situations without waiting.
The major mainstream exchanges offer a wide range of digital currencies with countless trading pairs. At the same time, deposits and withdrawals in fiat currency are also possible.
Disadvantages of CEX
Users store their crypto assets on the exchange. The integrated wallets are part of the system and are thus beyond the user’s control. Since the private keys’ ownership rests with the exchange, there is a risk of total loss should the exchange be compromised (Not your Keys, not your Coins). Cases of this kind are rare but historically have already occurred with losses in the millions.
Debatable disadvantage: centralized exchanges are under the control of regulators, third-party providers, and legal regulations. To prevent money laundering, operators are required to collect extensive data about their customers (KYC). This regularity is contrary to the basic idea of cryptocurrencies.
The great interest in decentralized financial applications (DeFi) caused a rush to decentralized exchanges (DEX). This type of trading venue describes an exchange that operates directly on a blockchain without a central controlling authority. As one of the most extensive forms of decentralized applications, DEX enable classic trading in cryptocurrencies. The advantage here is that users can trade immediately without logging in and have their private keys at all times.
In contrast, there are centralized exchanges — abbreviated CEX. A CEX (examples: Binance, Huobi, Coinbase) is based on a central system based on its own infrastructure. In contrast to a DEX, a third party always controls the trading activity. Centralized exchanges convince with their high liquidity and fast transaction exchange. However, in this context, the user is always dependent on the exchange and has no access to his private keys.
As the overview above has already made clear, both types of exchanges have their advantages and disadvantages. The complete decentralization of a DEX drives in line with Satoshi Nakamoto’s basic ideas in Bitcoin development. For many traders, however, the performance of CEX clearly argues for the use of mainstream exchanges. However, many CEX have recognized the advantages of decentralized exchanges and are now working on their own variants or integrating DEX features into their systems. Therefore, a future merger of both variants at the corresponding interfaces is possible.