Cryptocurrency exchange platforms are available in two forms: DEX and CEX. A decentralized exchange (DEX) app facilitates peer-to-peer trading directly between users via a blockchain. On the other hand, centralized exchange (CEX) platforms run under a company that manages the trading platform and holds user funds on behalf of its customers.
Understanding the difference between the two is crucial to determining which exchange platform best suits your needs. The differences impact how you interact with the platform, how transactions are processed, and the responsibilities assigned to you when using either a DEX or a CEX.
Centralized Exchanges (CEX) Explained
Centralized exchanges have a company that acts as the intermediary between buyers and sellers. Every transaction or trade made on a CEX platform is handled by a centralized system operated by the parent company.
Under CEX platforms, user funds and crypto assets are held in wallets controlled by the exchange. This means that when customers deposit their assets or cryptocurrency, the platform has custody.
Transactions and trades made on centralized exchanges are recorded in an internal order book maintained by the exchange. Most CEX platforms set their own rules for listings, fees, withdrawals, and account management.
Decentralized Exchanges (DEX) Explained
Unlike a CEX, decentralized exchanges don’t have an intermediary. DEX platforms, for example, flpp.io, allow users to trade cryptocurrencies directly without using a third party to hold funds or execute trades.
DEXs operate on blockchains and rely on smart contracts to record transactions, trade logic, and settlements. Users connect to a decentralized exchange system using non-custodial wallets, meaning that they retain control of their private keys and funds throughout the trading process.
Under DEX, traditional order books are replaced by automated market makers. This model determines liquidity depths based on the number of users who deposit cryptocurrency pairs into liquidity pools. Also, prices are determined based on the ratio of assets in each pool rather than pairing individual buy and sell orders.
Some of the popular DEX platforms are built on networks, such as Solana, Ethereum, and Binance Smart Chain. Each DEX uses smart contracts native to their respective blockchain.
DEX and CEX Considerations: Choosing the Right Exchange for Your Needs
When it comes to choosing between DEX and CEX, your decision should rely more on user needs rather than assumptions. Below are some of the things you should focus on.
§ Custody and Control of Assets
On CEX, your funds are controlled by the exchange operator. However, DEX platforms allow users to retain 100% control of their assets. If you still want to have full control over your cryptocurrencies, we recommend using a DEX platform.
§ Identity Requirements
Many DEX platforms allow users to trade without identity verification. Instead of using KYC, DEXs rely on blockchain protocols. For those who want to stay anonymous and trade directly without giving away their details, a DEX exchange is the right fit.
§ Fees and Transaction Costs
Fees will vary from platform to platform, whether a DEX or CEX. You should aim to find a platform that is transparent about its cost structure. Remember, the transaction fees will be deducted from the profit you make from trading crypto assets.
