DEXs or CEXs: Which is a Better Platform to Trade?

DEX

A DEX stands for decentralized exchange. A decentralized exchange is a peer-to-peer marketplace where direct transactions occur between crypto traders. These exchanges fulfill a core possibility of crypto, i.e., fostering the financial transactions which are not officiated by intermediary third parties like banks, payment processors, and brokers. DEXs don’t permit exchanges between fiat and crypto, unlike centralized exchanges. They facilitate the trading of cryptocurrency tokens for other cryptocurrency tokens.

CEX

A CEX or a centralized exchange is a platform operated by companies/organizations that own them, i.e., they operate in a centralized manner. These exchanges facilitate trade between users via an order book. These order books are a collection of purchase and sell orders posted by traders.

DEX versus CEX: What is the difference?

As the name suggests, CEXs are operated by centralized authorities, while users and liquidity providers operate via DEXs. This basic difference forms the foundation of several differences between the two platforms.

Custody of assets

CEXs control the access to all crypto assets invested. Before one starts trading, all the assets have to be placed in the custody of the platform, while in a DEX, users have complete control over their assets. However, since DEXs are non-custodial, the demand for the security of private keys increases.

Impermanent loss

DEXs provide a neat system for trading and provide the facility of liquidity pools to its users. However, this advantage comes with possible risks. Liquidity providers are exposed to the risk of impermanent loss in decentralized exchanges. They can only withdraw their share in the value of the liquidity pool instead of the number of tokens they invested in it.

Safety Mechanisms

The popularity of DEXs has been high, but they lack safety mechanisms. DEXs do not require the users to comply with KYC requirements. Traders can start trading on a DEX by integrating their crypto wallet with the platform.

Trading Options

CEXs offer a wide range of trading options which include multiple trading options, including futures and spot trading, among others. DEXs are limited to crypto borrowing and lending and speculative investments.

Liquidity

Since CEXs possess a large user base, they have higher liquidity. The lack of due diligence and competition from CEXs reduce the liquidity of DEX platforms. New and emerging DEXs cannot compete with well-established CEXs in terms of liquidity. However, new aggregator and compliance protocols appear to be a potential solution to the liquidity problem on DEXs.

Security

Decentralized exchanges are comparatively more secure than their centralized counterparts since they are non-custodial. Hackers target exchanges to access the central database and extract the private keys of account holders. DEXs don’t hold any of the private keys, eliminating the possibility of user wallets getting hacked. No identity checks are done on DEXs hence it rids the risk of leaking private user data.

CEX or DEX: What should I trade on?

As is visible from the above comparison, DEXs emerge as a better and easier alternative to centralized exchanges, given the variety of options, greater control over our holdings, and easy onboarding. However, DEXs are less liquid and more prone to security risks.

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