Bitcoin was not the first cryptocurrency, but it was its appearance that became the impetus for finding ways to trade digital assets. The first cryptocurrency exchanges began to function already in 2010, historically – almost immediately after the launch of the Bitcoin blockchain. They were created in the image and likeness of classical stock and currency exchanges, and these sites were centralized (CEX).
In 2014, the first decentralized crypto exchange (DEX) was launched on the basis of the Ethereum blockchain. The idea of decentralized marketplaces was not very enthusiastic. This has changed dramatically since the ISO boom of 2017-18. DEX gained real popularity after the introduction of automatic market maker technology.
Today, the situation with DEX and CEX is often positioned as a confrontation between the future and the past. There is an opinion in the crypto community that CEX is yesterday, the lesser of evils, etc.
However, centralized sites still retain leadership positions and are not going to give them up. Suffice it to recall Binance, KuCoin or Kraken, where operations are available to convert ZIL to USD and many other trading pairs. CEX services are used by millions of clients from all over the world, the sites are actively developing and attracting new investors.
And yet, DEXs are not standing still either. Yes, in many respects they are still inferior to the CEX, but they are more in line with the spirit and letter of the cryptocurrency concept. Consider the fundamental differences between the two types of sites.
Centralized trading platforms perform intermediary functions. They have their own servers, which store all the data and funds of users and process trading operations. That is, a functionally modern centralized crypto exchange is almost no different from a conventional currency exchange. Moreover, forex platforms are increasingly adding cryptocurrencies to their listings.
CEX users can:
- Create accounts and store funds on an exchange wallet.
- Make transactions with cryptocurrencies.
- Carry out trading operations.
The security of funds, control over the execution of operations and other services are within the competence of the exchange and are implemented from a single center. Account registration is required, often additional verification of the user’s identity is required.
Decentralized exchanges operate on the blockchain. They do not have a central authority and servers. Trading operations are based on smart contracts. The parties to the transaction interact with each other without intermediaries.
How DEXs work:
- The user has full control over his wallet and account.
- All transactions are executed on the blockchain. Once another user has responded to an order, it is no longer possible to stop or cancel its execution.
- The site does not perform intermediary operations.
- User verification is not required at all. All activity is performed anonymously.
The difference between DEX and CEX comes down to the presence of a third party involved in transactions. CEX is not related to the blockchain and is a classic intermediary site. DEX is based on the blockchain and provides the ability to make peer-to-peer transactions.
Pros and cons of CEX
Using CEX is still noticeably easier, even for beginners. In addition, among the advantages of centralized sites are called:
- Extensive functionality.
- Large selection of trading pairs.
- Ability to buy and sell digital coins for fiat.
Centralized management also has its disadvantages:
- Any account, together with the funds stored on it, can be blocked by the administration.
- There is a non-zero chance of hacking servers. Recall that the reason for the collapse of Mt.Gox, one of the first crypto-exchanges, was precisely a successful hacker attack.
- Deanonymization of users.
- Transaction limits.
- Possibility of asset price management by the administration.
- The exchange may close at any time and it will be impossible to return the funds in this case.
In fact, privacy and all other benefits of cryptocurrencies end at the CEX threshold.
Pros and cons of DEX
The absence of a central controlling authority means that transactions are carried out directly between the participants in the transaction. It’s faster, cheaper and safer. In addition, there are other advantages:
- Complete anonymity of users.
- Lack of government control.
- Maximum security of user assets.
- No restrictions on transactions.
To work with DEX, you need experience with cryptocurrency, which not everyone has. However, DEX are improving and soon this difference between exchanges will disappear.
Which exchange is better
Trite, but still the choice is determined by your priorities, goals, objectives and assets that interest you. CEXs still serve as a bridge between traditional and decentralized finance. It is still easier to exchange XVG to USD or another fiat currency on a centralized platform, which cannot be said about buying digital assets. It is already possible to buy coins for fiat directly through a crypto wallet or on the DEX. The functionality for trading is also gradually expanding.
Perhaps the main selection criterion is your attitude towards anonymity. If it is fundamentally important for you to remain incognito, then it is better to initially choose DEX.