{"id":66069,"date":"2022-12-27T19:10:25","date_gmt":"2022-12-27T13:40:25","guid":{"rendered":"https:\/\/mudrex.com\/blog\/?p=66069"},"modified":"2024-03-24T16:29:31","modified_gmt":"2024-03-24T16:29:31","slug":"cex-vs-dex-explained","status":"publish","type":"post","link":"https:\/\/mudrex.com\/learn\/cex-vs-dex-explained\/","title":{"rendered":"CEX Vs DEX: What Are the Key Differences? Explained"},"content":{"rendered":"\n

Bitcoin (BTC)<\/a>, the world’s first cryptocurrency, was launched in 2009. Since then, cryptocurrencies have come a long way to be recognized as an asset class. At its peak, the crypto market\u2019s total market cap<\/a> went up to three trillion dollars. Also, despite the ongoing crypto winter<\/a>, it is still above 800 billion dollars as of December\u201922. It is an excellent milestone, considering the cryptos are just over a decade old.<\/p>

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Multiple factors are responsible for the skyrocketing crypto adoption, and crypto exchanges are definitely one of them. They are a gateway for the retail masses to enter the crypto sphere. There are broadly two types of exchanges \u2014 CEX and DEX. CEX stands for Centralized Exchange,<\/a> while DEX stands for Decentralized Exchange<\/a>.<\/p>\n\n\n\n

While the primary function of both types of exchanges is to enable the buying and selling of cryptocurrencies, it’s essential to understand how they differ in their working to determine which one is best for you. following comparison between CEX & Dex (CEX VS DEX) on their key differences will provide an context on how different exchanges work & what are its pros and cons<\/p>\n\n\n\n

<\/span>What Is a CEX?<\/strong><\/span><\/h2>\n\n\n\n

Centralized Exchange (CEX) might sound like a generic term. But in this context, it refers to crypto exchanges that serve as intermediaries between traders\/investors, allowing them to buy and sell cryptocurrencies.<\/p>\n\n\n\n

A CEX is wholly owned and controlled by a single entity. <\/em>It’s responsible for maintaining user funds and executing trades. Thus, the users must trust the entity while placing the trade orders.<\/p>\n\n\n\n

Some well-known CEXs include Binance, Coinbase, Kraken, and KuCoin.<\/p>\n\n\n\n

<\/span>How Does a CEX (Centralized Exchange) Function?<\/strong><\/span><\/h2>\n\n\n\n

A CEX operates similarly to a traditional stock exchange but deals in digital assets instead of stocks.<\/p>\n\n\n\n

You can buy and sell company shares on a stock exchange. Likewise, a CEX allows users to trade cryptocurrencies at real-time values.<\/p>\n\n\n\n

<\/span>1. Verification process<\/strong><\/span><\/h3>\n\n\n\n

CEXs often have stringent Know-Your-Customer (KYC) requirements.<\/p>\n\n\n\n

To become a registered user, one might have to provide name identity, address proof, and sometimes biometric verifications. Thus, it may not be convenient for those looking to trade anonymously.<\/p>\n\n\n\n

After registering, the user gets their login credentials to access their account and start trading.<\/p>\n\n\n\n

<\/span>2. Fund custody<\/strong><\/span><\/h3>\n\n\n\n

When a trade happens on a CEX, it is usually the exchange that holds buyers’ funds and the seller\u2019s cryptos to make the trade happen. Instead of directly dealing with a buyer\/seller, you are dealing with an entity. While this can be very useful when trying to avoid fraudsters, it requires you to trust the exchange.<\/p>\n\n\n\n

Also, most retail users usually leave their assets and funds on the exchanges, thereby, giving custody of their funds to the platform. That\u2019s not to say that you can\u2019t transfer your funds to a privately held wallet.<\/p>\n\n\n\n

<\/span>3. Order book model<\/strong><\/span><\/h3>\n\n\n\n

Any centralized exchange (like Binance) uses the ‘order book’ model to handle the transactions.<\/p>\n\n\n\n

An order book is an electronic record comprising a list of buy and sell orders from traders. The order contains the quantity and price of the asset they want to buy or sell. When a buyer quotes a buy order to purchase an asset, the exchange finds a matching sell order to execute the trade.<\/p>\n\n\n\n

But, this approach is not without its challenges. There is something called the ‘Bid-Ask Spread.’ <\/p>\n\n\n\n

‘Bid’ and ‘Ask’ refers to the price quoted by the buyer and the seller, respectively, for an asset. The difference between the bid and ask price is called the bid-ask spread.<\/p>\n\n\n\n

Usually, the buyers look for the lowest price, and the sellers look for the highest price. They might not quickly agree on a single value. As a result, the difference between the two prices might increase, indicating a wider bid-ask spread. <\/p>\n\n\n\n

<\/span>What Is a DEX?<\/strong><\/span><\/h2>\n\n\n\n

Decentralized Exchange (DEX<\/a>) is a term exclusive to the crypto space. As the name suggests, DEX operates as a decentralized network and isn’t owned by a single entity or authority. It is a peer-to-peer marketplace to trade or exchange cryptocurrencies without the help of any intermediary.<\/p>\n\n\n\n

Regarding functionalities, DEXs offer a much more comprehensive range of trading options than CEXs. It allows people to trade cryptos, earn savings interest over crypto, insure against risks, loan funds, speculate prices using derivatives, etc.<\/p>\n\n\n\n

Well-known DEXs include Maker, UniSwap, PancakeSwap, and Compound.<\/p>\n\n\n\n

<\/span>How Does a DEX (Decentralized Exchange) Function?<\/strong><\/span><\/h2>\n\n\n\n

Decentralized exchanges are gaining traction in the crypto space. They offer users a secure environment for trading digital assets since it removes your dependency on a centralized entity.<\/p>\n\n\n\n

<\/span>1. Verification process<\/strong><\/span><\/h3>\n\n\n\n

Unlike a CEX, a DEX does not require users to submit personal information for verification purposes. As a result, these exchanges are much more anonymous, making them popular among those seeking greater privacy in their trading activities.<\/p>\n\n\n\n

<\/span>2. Fund custody<\/strong><\/span><\/h3>\n\n\n\n

DEX follows a self-custody regime as the user owns the private keys to their assets. It helps them to have complete ownership of their investments.<\/p>\n\n\n\n

<\/span>3. Blockchain technology<\/strong><\/span><\/h3>\n\n\n\n

To know how a DEX works, it’s essential to understand its underlying infrastructure – blockchain.<\/p>\n\n\n\n

At its core, a DEX is powered by blockchain technology. It acts as an immutable public ledger for all transactions on the platform. These transactions happen on-chain<\/a> and are verified by the decentralized network before getting stored on the blockchain. <\/p>\n\n\n\n

In addition, most DEXs leverage smart contracts to facilitate trades. Smart contracts are computer codes that automatically execute orders when certain conditions are met. For example, when two parties agree to swap their tokens, the smart contract will execute the trade on behalf of both parties when conditions around payments are met. Unlike CEX, smart contracts eliminate the need for intermediaries like Binance to facilitate transactions.<\/p>\n\n\n\n

<\/span>4. Liquidity pool<\/strong><\/span><\/h3>\n\n\n\n

While CEXs use the order book model, DEXs rely on ‘liquidity pools<\/a>.’\u00a0<\/p>\n\n\n\n

A liquidity pool is a pool of crowdsourced funds locked into a smart contract to provide liquidity for a DEX. There is no intermediary or central authority to run the DEX. Thus, unlike traditional markets, users transact against the liquidity in a smart contract rather than with other users.<\/p>\n\n\n\n

Three fundamental building blocks are helping the liquidity pool work seamlessly \u2014 Liquidity Providers, Liquidity Provider Tokens, and Automated Market Makers.<\/p>\n\n\n\n