DEXs have grown in prominence not simply as a result of the excitement around decentralized financial products (DeFi). However, the rush to Uniswap, a decentralized exchange, revived the discussion about the benefits and drawbacks of decentralized and controlled exchanges (CEX). Many crypto enthusiasts predict that decentralized exchanges’ market share will grow dramatically in the future. Many of the well-known crypto exchanges are also developing a decentralized version of their trading platforms. It is therefore necessary to examine the characteristics of the various forms of exchanges. Will cryptocurrency trading truly decentralize in the future?
Trading History of Cryptocurrency Exchanges
Let’s take a look back at the history of CEX vs. DEX before we get into the technical differences. In truth, the current state of digital currency and token trading is only a few years old. Since Satoshi Nakamoto made the first bitcoin transaction to Hal Finney in early 2009, a lot has happened in the world of bitcoin (BTC)For the first time as a central authority, the New Liberty Standard determined the price of 1 BTC in 2009. Mt.Gox, the first Bitcoin exchange, opened its doors a year later. Mt.work Gox’s culminated in one of the most serious cryptocurrency thefts to date in 2014. The exchange fell bankrupt after hackers stole 744,000 BTC.
Meanwhile, Coinbase grew to prominence and is today one of the world’s top cryptocurrency exchanges. Coinbase, an American controlled exchange, dominated the industry by providing a simple trading interface with an integrated wallet and a professional exchange.
Other exchanges opened their doors as a result of the growing interest in digital currencies. The majority of these exchanges were centralized, and well-known representatives like Binance, Bitmax, Bitfinex, and OKEx surged to the top swiftly. There was no way around these trade sites for a long time.
What’s The Difference Between CEX and DEX?
Decentralized and centralized exchanges have coexisted for many years, as previously demonstrated. Despite the fact that DEX’s popularity has not yet reached that of its centralized equivalents, they play a key role in the history of digital currencies. DEX Uniswap even managed to beat the daily trading volume of crypto behemoth Coinbase during the DeFi craze. But why are there two types of trades in the first place, and what is the difference between them?
CEX – Centralized Exchange
A centralized exchange is one that is run by a corporation. The corporation employs a CEO and has complete control over the exchange. These are comparable to regular stock exchanges, but instead of shares, they deal in cryptosystems.
- A third-party operator will be present.
- Transactions in fiduciary currency will be permitted.
- The entries will remain in the database for the most part until the coins are withdrawn or extracted.
- Negotiation pace has improved (no real-time cryptographic node update)
- The exchange’s liquidity will be more evident.
- Anti-Money Laundering and Know Your Customer (KYC) (AML).
- prone to system hacking.
Binance, CEX.io, Kraken, and OKEx are examples of centralized exchanges that have their own order book. Every order is logged and approved in this section. Data is shared internally via dedicated servers and goes through centralized security protocols to assure accuracy. CEXs, for the most part, are regulated and have extensive know-your-customer regulations built in. Simultaneously, centralized exchanges vigorously pursue fraudsters in accordance with current regulations in order to prevent money laundering. Beginners prefer this type of exchange because the centralized structure provides for a user-friendly interface that makes purchasing and managing digital currencies quite simple.
DEX – Decentralized Exchange
There is no one in charge of a decentralized exchange. It does not have a CEO or employees. The exchange is based on blockchain technology and is occasionally managed democratically, with users participating in decision-making procedures. Decentralized exchanges also do not rely on a third party to keep track of the crypto currency, making transactions faster than on a centralized exchange.
- There will be no transactions with fiduciary currency allowed.
- Market Takers are typically simply a section of the platform.
- The volume of encrypted trade transactions will be significantly reduced.
- Trading speed on a low level (due to real-time updating of the cryptographic node)
- The problem will be liquidity (only handle Crypto Coins in Nodes)
- Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures are not required.
- In the application, there are no private keys.
Users of decentralized exchanges like Pancakeswap, Uniswap, Bisq, and GDEX do so primarily for two reasons: anonymity and high security. DEX are anonymous since trading requires almost no user data. Users are frequently simply required to have a public address in order to trade on a decentralized exchange. As a decentralized program, there are no third parties (authorities or financial regulators) monitoring or imposing regulations on the exchange. Its high level of security is another reason for its success. While CEX users have no control over their private keys, DEXs do not have an integrated hot wallet, therefore users retain control of their private keys.
Advantages of a DEX:
A decentralized exchange is not subject to government rules or oversight. In direct trading, users trade directly with one another, with no third party involved. Each user has complete control over their private keys and, as a result, their cryptocurrency holdings.
One of the most compelling reasons to trade on a DEX is anonymity. There is no authentication procedure, no Know Your Customer (KYC), and no personal documents are uploaded to servers in other countries. Trading can usually begin with just a personal address on the relevant blockchain. There is no personal data interchange between the exchange and the authority.
A decentralized server network is used to provide low-cost trading with a high number of trade pairings. This greatly reduces the possibility of a hacker attack and almost eliminates inaccessibility due to server faults. A DEX cannot be used to target a central server because it is directly on the blockchain.
Disadvantages of a DEX:
Trading on a decentralized exchange is typically much slower than trading on a controlled exchange. Each transaction must be validated by miners, however this differs by DEX. Decentralized exchanges are hardly suited as a trading venue when it is important to react to rapidly changing market conditions.
Liquidity is critical to an exchange’s performance. The most popular trading venues are always the exchanges with the biggest liquidity. Because decentralized exchanges are a relatively new concept, there are many fewer traders than on CEX. As a result, liquidity has decreased dramatically.
DEX’s capabilities are still limited. In addition, for newcomers, the graphical user interface is frequently too confusing. Many traders do not have access to limit orders, margin transactions, or stop losses. Most decentralized exchanges, on the other hand, are attempting to adopt CEX’s functionality.
Advantages of CEX:
Even for beginners, the user interfaces are simple to comprehend, and the processes and procedures may be easily assimilated. Access to the various trading alternatives is simple and straightforward. A high degree of functionality overall, with a variety of trading options and a large number of cryptocurrencies.
CEX has a lot of liquidity because of its high trading volume. The exchanges can easily and rapidly meet their payment obligations. The frantic activity on centralized trading venues assures a large number of buy and sell orders, ensuring market-friendly trading.
CEX is based on a central and individual infrastructure. This allows for near-real-time transaction exchange. The leading exchanges’ algorithms can process thousands of orders each second. Traders can react quickly to changing market conditions.
The biggest mainstream exchanges offer a diverse selection of digital currencies, as well as a plethora of trading pairs. Deposits and withdrawals in fiat currency are also permitted at the same time.
Disadvantages of CEX:
The exchange is where users keep their crypto assets. Because the integrated wallets are part of the system, they are not within the control of the user. Because the exchange owns the private keys, there is a risk of total loss if the exchange is compromised (Not your Keys, not your Coins). Cases of this nature are uncommon, although they have occurred in the past, resulting in millions of dollars in losses.
Regulators, third-party providers, and legal laws all have authority over centralized exchanges, which is a debatable drawback. Operators are obligated to collect detailed data about their customers in order to prevent money laundering (KYC). This regularity runs counter to the fundamental concept of cryptocurrency.
Both sorts of exchanges have advantages and downsides, as we’ve seen in our summary above. A DEX’s complete decentralization is in line with Satoshi Nakamoto’s primary Bitcoin development ideas. The performance of CEX, on the other hand, clearly advocates for the usage of major exchanges for many traders. Many CEX, on the other hand, have recognized the benefits of decentralized exchanges and are already developing their own variations or incorporating DEX capabilities into their systems. As a result, the merging of both variations at the respective interfaces is achievable in the future.