CEX vs DEX
Last updated
Last updated
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.
Simple and user-friendly interface, suitable for beginners
An added layer of security and trustworthiness
Higher liquidity than a DEX
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
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.
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.
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.
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.
Completely private and anonymous
No need to transfer assets to a third party
Fees are redistributed to liquidity providers, not to a centralized entity
You can't trade with fiat currencies
Risk of impermanent loss for liquidity providers
Liquidity can be thin, making it harder to execute large orders
