Table of Contents
- What Is a Decentralized Exchange?
- Important Differences Between a Centralized and a Decentralized Exchange
- The Decentralized Exchange: The Future of Crypto Exchanges?
Centralized exchanges have long played a critical role in finance. Yet, the recent emergence and growing popularity of decentralized exchanges (DEXs) has led to a popular question:
Which is better? Centralized exchanges (CEXs) or their decentralized counterparts?
What Is a Decentralized Exchange?
Because DEXs are a novel financial instrument made possible thanks to DeFi, their infrastructure affords a bit more flexibility. For instance, while the earliest DEXs relied on order books, much like their centralized counterparts, they've since emerged with a variety of ways to structure themselves, which influences how they provide liquidity to users.
Since we're still in the early developmental stages, DEXs like Uniswap and Sushimay feel a bit clunky and limited. Centralized exchanges like KuCoin and Binance may grant users a smoother user experience.
Another key difference is that CEXs can provide currencies from different blockchains. The majority of DEXs still run on the Ethereum blockchain.
However, some other blockchains have released their own DEXs. They include PancakeSwap on Binance Smart Chain and Zero Exchange on the Avalanche blockchain. (Zero Exchange acts more as a bridge between chains, and can thus be considered chain-agnostic.)
Important Differences Between a Centralized and a Decentralized Exchange
Let's take a closer look at several other critical differences between a CEX and a DEX by breaking them down.
In contrast, with a DEX, greater ownership over your own assets requires you to learn more about how it all works. You must also carry a heightened appetite for risk. Greater knowledge affords better security and protection from malicious third parties — but it is a cost of self-custody (one that's still very much worthwhile).
DEXs can also provide security, but in another form: preventing market manipulation. Thanks to blockchain technology, all transactions are recorded on the chain, so they're traceable. A centralized exchange platform does not provide the same level of transparency, and this comes with its own risks.
This mostly affords decentralized exchange users convenience of considerable magnitude. After all, to trade on a DEX all that is typically required is to connect your crypto wallet.
Moreover, many CEXs have become notorious for charging exorbitant fees. DEXs often charge such a negligible trading fee that it does not warrant the attention of traders.
CEXs like KuCoin and Binance provide trading bots to their users as well as passive-income opportunities like staking. DEXs, by comparison, provide users with options to participate in yield farming and liquidity pools.
The Decentralized Exchange: The Future of Crypto Exchanges?
There are many more differences between CEXs and DEXs, but we've covered the most important ones here. You should be able to tell by now that there are tradeoffs to using each one. That's why we recommend using both, depending on your purpose, location and circumstances.
For instance, if you're purchasing crypto with fiat, it's best to find a CEX you're comfortable using, one that's available in your country. But if it's small-cap coins you're after on the Ethereum blockchain, Uniswap might be your best bet.
It really does depend on your needs. The cryptocurrency market is evolving rapidly. More and more novel DeFi financial instruments are looming on the horizon.
But that won't mean the end for CEXs — awesome DeFi innovations will no doubt bleed into centralized cryptocurrency exchanges as well.