Centralized Exchange (CEX) vs. Decentralized Exchange (DEX)

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The biggest threat to cryptocurrencies is not volatility, as most assume. Instead, it is the fact that 80% of cryptocurrency trade still happens on centralized exchanges.

Sometimes I think about how contradictory it is to use centralized exchanges like Binance against the ethos of decentralized cryptocurrencies. Issues like FTX downfall, Mt. Gox, and Crypto exchange hacks have taught us that the world also requires decentralized exchanges.

It is a shame that the whole purpose of monetary sovereignty for which Satoshi Nakamoto created Bitcoin is still at the helm of centralized parties.

But I feel the time is not very far when we see this trend changing. It has started to change as numerous decentralized exchanges are increasing with their different approaches.

  • Well, why do we need decentralized exchanges (aka DEX)?

I am not going to answer this again in this article but I would like to leave you with a link where I have spoken extensively about the pros and cons of both kinds of exchanges.

Here you go: Why Are Decentralized Exchanges The Future Of Cryptocurrencies?

Now that you have read the aforementioned article, it makes sense to talk about centralized and decentralized exchanges from a deeper perspective.

Centralized Crypto Exchanges

We all know about some famous centralized exchanges such as these:

No doubt that since the beginning, centralized exchanges have made cryptocurrencies like Bitcoin, Ethereum, etc, accessible to the masses around the world. I also acknowledge that they did a very good job of providing the much-needed push and liquidity to crypto markets.

But they also had their fair share of criticisms and failures. Some of these were:

  • Exchange hacks: More than 30 cryptocurrency exchange hacks in the last 9 years, with some of them as big as Mt.Gox, BitGrail, Coincheck, FTX, etc.
  • Govt ban: The China ban, the Korea ban, and the Russia ban, etc.
  • Poor Support: Anyone who has used a central exchange knows of this problem.

Such bans and hacks happen because when you buy cryptocurrencies on centralized exchanges, like Bybit or Binance, you don’t own them. It is so because these exchanges don’t give you the private keys of your funds. Instead, they just credit appropriate crypto numbers against your order. (Read more about private keys here.)

Also, there is an additional headache of KYC compliance and identity document submission that one has to do while using such centralized services. And this opens you to another vulnerability of identity theft or your personal identity information getting leaked via centralized exchanges.

Not just this, nowadays, popular centralized exchanges are not listing most of the ICOs or token sales because of the increased regulatory pressure from the US SEC and the rest of the world.

Fun Fact: Decentralized exchanges can list any ICO or token because they can’t be shut down as there is no single point of failure in their model. There is no server to shut down!

Decentralized Exchanges (DEX)

How does decentralised exchanges work
How do decentralized exchanges work

Because of the limitations mentioned above and the issues, I agree with what Vinny Lingham recently tweeted.

Of course, not all exchanges will fail, but the failure of some major exchanges, coupled with governments cracking down on centralized exchanges, can catalyze the emergence of decentralized exchanges.

The reality is that we are not there yet, despite many decentralized exchanges in the pipeline. It is so because decentralized exchanges have all the inherent limitations of blockchain technology, and one of them is scalability.

Some of those decentralized exchanges and protocols are:

A complete DEX’s list is here.

Also, almost all decentralized exchanges that are in operation today give you the feeling of old-age internet websites that are slow and sometimes unusual due to lack of enough traffic on it. And when you don’t have enough buyers/sellers on an exchange, it is akin to the death of that platform.

2022 update: Thanks to websites like GMX exchange, 1inchexchange, Uniswap, Dex’s don’t feel like the old age internet websites anymore. They are fast and one of the best liquidity providers of any coin.

But as I mentioned earlier, the crypto regulations, bans, and hacks will catalyze the development of decentralized exchanges. And you should expect better user experience and liquidity on DEXs because smart contract techs like off-chain atomic swaps and on-chain atomic swaps are going to make the cryptocurrency exchanges peer-to-peer and trustless very soon.

Conclusion:  Decentralized Exchanges Vs. Centralized Exchanges

Decentralized exchanges will soon be a household name because that’s the only way cryptocurrencies can thrive, given the bans and regulations.

And the development of so many DEX and DEX protocols clearly shows that the pioneers of the cryptosphere have realized that if cryptocurrencies need to go mainstream beyond the FUD, we will require peer-to-peer censorship-resistant decentralized exchanges in the market.

However, the exchange of cryptocurrencies into fiat currencies like USD, EUR, etc is a lot harder to be decentralized because systems like US Dollar itself are centralized.

Interestingly, this problem can be solved by having stable coins pegged to fiat currencies. The classic example of such a cryptocurrency is USDT, BUSD, USDC, and others.

But this can be done easily, in a fair manner, by keeping a stringent auditor in place. Some fiat-pegged currency projects are coming up that provide the much-needed liquidity, fairness, and fiat interaction needed in the market. And this will serve as a cure to fiat on/off ramp problems that decentralized exchanges might run into in the future.

Needless to say, all the missing pieces for creating a robust infrastructure of decentralized exchanges are coming together. That is why it is wise not to do away with decentralized exchanges now, no matter how good your favorite centralized exchange is.

Now it’s time to hear from you: What do you think about centralized and decentralized exchanges? Which DEX project are you following/using? How has your experience been? Did I miss any good DEX projects on this list? Do let me know your thoughts in the comments section below!

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1 thought on “Centralized Exchange (CEX) vs. Decentralized Exchange (DEX)”



    I recently tried the Kyber Network decentralized exchange. Very slick. Nice intuitive interface and very fast transaction/confirmations. DEX exchanges are destined to take over the Exchange markets from Centralized Exchanges over time.

    And, thanks for all the good info you provide on your website. Very informative and educational always.

    Gerald Williams

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