CEX vs DEX

CEX (Centralized exchange)

Centralized exchanges are platforms that allow users to buy and sell cryptocurrencies for fiat currencies such as the US dollar or digital assets like BTC and ETH. They operate as trustworthy brokers in deals and frequently serve as custodians, keeping and safeguarding your cash.

Top 10 cryptocurrency exchanges ranked by trust score

Pros of centralized exchanges

Simple and user-friendly interface, suitable for beginners
An added layer of security and trustworthiness
Higher liquidity than a DEX

Cons of centralized exchanges

Charges service fees
Controlled by a centralized party, so the server can be shut down anytime (in theory)
Highly vulnerable to hacking or cybersecurity threats

DEX (Decentralized exchange)

A decentralized exchange is an alternative to traditional centralized exchanges in which no single entity is in charge of the assets. In contrast to a traditional CEX, smart contracts and decentralized apps are used to automate transactions and trades.

This method is far safer since no security breach is possible, assuming that the smart contract is properly constructed.

What does decentralized mean in cryptocurrency?

Decentralized crypto exchanges vary from centralized crypto exchanges in that they allow users to keep control of their assets by running their important activities on the blockchain. So, how do decentralized exchanges work? They either run on an AMM (automated market maker) or a traditional order book model.

AMM model

Liquidity for an asset and its swap pair are pooled in a smart contract. Those who pool funds are eligible to receive the fees generated from the swaps using this pool.
When someone makes a swap in the pool, the balance of assets in the pool are automatically rebalanced to 50/50 value, and the price of the tokens change to reflect the new supply.
When there is not enough liquidity in a pool, and a large swap is made, the trader will run into high slippage issues; meaning the lack of liquidity will result in above-market purchase price.

Order book model:

An order is placed by a token owner to swap their assets for another asset offered on DEX. The owner of the token determines the number of units they must sell, the token's price and the time limit for accepting bids for the assets.
Other users can offer bids by placing a purchase order after the selling order has been made.
Once the sellers have chosen the time, both sides evaluate and execute all of the offers.