With the rise of decentralization, the concept of decentralised exchanges have come about. Crypto exchanges in general are platforms that allow users to buy, sell, trade, and earn cryptocurrency. However, most exchange platforms are centralized.
In this course, we’re going to go into the differences between centralized (CEX) and decentralized exchanges (DEX), the key features and benefits of DEX, and some of today’s most popular examples.
Let’s dive in →
Key DEX Features
A decentralized exchange (DEX) is a type of cryptocurrency exchange that operates on a decentralized blockchain network. DEXs allow users to trade cryptocurrencies directly with each other without the need for a middleman.
Here are some key features and benefits of DEXs:
- Decentralization: DEXs are decentralized, meaning that there is no central authority or single point of failure.
- Security: DEXs use smart contracts to execute trades, which are immutable and self-executing. This means that trades are more secure and less prone to fraud than on centralized exchanges.
- Privacy: DEXs allow users to trade cryptocurrencies without the need for a KYC (Know Your Customer) process, which is required by many centralized exchanges. This means that users can maintain their privacy and trade anonymously.
- No Custody: DEXs don’t require users to deposit their funds into a centralized wallet, which reduces the risk of funds being lost or stolen due to hacks or internal fraud.
- Interoperability: DEXs can be used to trade a wide range of cryptocurrencies and tokens, including those that are not listed on centralized exchanges.
Difference between a CEX & DEX
The main difference between a centralized exchange (CEX) and a decentralized exchange (DEX) is the way they operate and the level of control they offer to their users. Here are some key differences:
- Centralization: CEXs are centralized, meaning that they are owned and operated by a single entity, whereas DEXs are decentralized, meaning that they operate on a distributed network of nodes without a central authority.
- Control: CEXs have a higher degree of control over users’ funds and activities. Users typically deposit their funds into a centralized wallet, and the exchange controls the private keys needed to access those funds. In contrast, DEXs allow users to control their funds directly through their own wallets, and there is no central entity controlling the private keys. As we all know “Not your keys, not your coins”
- Security: Although DEX can be more secure due to decentralization, thre tend to be more hacks on DEX than major CEX, like Binance, for example.
- Trading Pairs: CEXs usually offer a wider variety of trading pairs than DEXs, including fiat-to-crypto pairs, which are not available on most DEXs. However, DEXs often offer a broader range of crypto-to-crypto trading pairs.
- KYC/AML: CEXs are often subject to regulatory requirements, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) laws, which require users to provide personal information and go through a verification process. DEXs, on the other hand, may not require KYC/AML due to their decentralized nature.
Overall, the key difference between CEXs and DEXs is the degree of control and security they offer. CEXs may offer more convenience and a wider range of trading pairs, but they also come with a higher degree of risk and less user control.
DEXs, on the other hand, prioritize decentralization, security, and user control, but may have fewer trading pairs and less liquidity.
Today, there are over a dozen different DEX providing opportunities for crypto users and traders, with new ones being launched on a regular basis.
Some popular examples of DEXs include Uniswap, PancakeSwap, and Sushiswap. These platforms use automated market makers (AMMs) to determine the price of cryptocurrencies based on supply and demand. What are market makers? Stay tuned for an upcoming course!
Overall, DEXs are becoming increasingly popular among cryptocurrency traders due to their decentralization, security, and privacy features.