CEXs are Centralised Exchanges.
They are owned by a single entity that makes all features and functions within the CEX’s software that enable us to buy and sell cryptos.
Examples of CEXs include Binance.com, Kucoin.com and Huobi.com.
DEXs are Decentralised Exchanges.
They are not owned by any single entity and operate via smart contracts and decentralized protocols (“protocols” = rules).
Examples of DEXs are Uniswap.org, Curve.finance and dYdX.exchange.
There are pros and cons to trading cryptos using CEXs or DEXs.
Because of their differences and their respective benefits, they will each have their own sets of users who prefer one over the other.
Here are some of the pros and cons for each one for you to get up to speed quickly. They will be important for you to understand the concept of Decentralised Finance (or “DeFi”) later.
1. Ease Of Use
When a single entity manages an exchange like a CEX, it is able to quickly determine the best features and functions for its platform, and program them quickly.
CEXs are also better able to serve users who are not as technical, with a login page that looks like an email login page. Their users’ wallets are stored on their exchange, with the CEXs controlling those wallets’ private keys.
When no single entity manages an exchange like a DEX, its development is based on its original smart contract on a blockchain and future modifications or additions to that smart contract based on its users’ requests and votes.
Thus new features and functions tend to be much slower to manifest in a DEX compared to a CEX.
DEXs also serve the more technically-savvy crowd. Users must know how to operate their own crypto wallets and connect them to the DEXs.
As such DEXs don’t control their users’ private keys to their own wallets, unlike CEXs.
See “Lesson #2: Crypto Wallets” on the different types of crypto wallets that are available to users today.
2. Customer Support
A CEX will have a dedicated support team to provide customer support. Thus you can get quick answers to your questions, with quick resolutions to your problems with the exchange (if any) — sometimes within minutes.
A DEX relies on its team of developers and its community to provide support through discussion forums. This can be slower, and responses may not be as accurate.
Liquidity for crypto exchanges means there is a wide variety of cryptos available for trading on those exchanges, AND/OR a big number of traders active on it.
A wider variety of crypto assets provides traders with more options and flexibility in their trading strategies, which will increase the number of traders, which will increase volume of trades, which will increase the exchange’s liquidity.
A higher number of traders trading on a particular crypto exchange is advantageous to the exchange as the traders can easily find buyers or sellers for the cryptos they want to buy or sell.
A CEX will generally have higher liquidity due to their larger user base, due to the CEX’s ease of use. This enables trades to be executed quicker and easier.
A DEX will generally have lower liquidity as they are harder to use and requires a higher level of technical know how, so it will generally have fewer users than a CEX.
Thus a DEX’s trades tend to be executed slower and there can be higher slippage for each trade. “Slippage” occurs when your expected price to buy or sell is not met and you may end up paying more, or selling less, than your expected price.
On the other hand:
1. Custody Of Assets
DEXs operate through smart contracts, so users retain control of their funds as they are trading DIRECTLY with one another without the need for a trusted third party.
DEXs’ users’ assets remain in their own wallets, thus they are always in control of their own private keys.
CEXs, however, require you to deposit your assets into “your” wallet at their exchanges.
The CEXs hold the private keys to your wallet, so they are actually holding your assets for you.
DEXs are less prone to hacking since their users’ funds are held in their users’ own wallets, not in the DEXs themselves.
Thus transactions on a DEX are settled on the blockchain itself, which is tamper proof. There is also a much lower risk of theft compared to a CEX.
On the other hand, CEXs are prone to hacking, theft and mismanagement as they are operated by teams of people. The major CEXs would usually have many security layers in place to prevent them from happening, although nothing can be 100% secure.
CEXs will also have insurance to cover losses that may arise from hacking activities, in addition to compensating their users from out of their own profits if there is a shortfall. This is so that they can continue to build up the trust between them and their users for the latter to continue to trade on their exchanges.
This is because the CEXs can earn up to millions of dollars a day in trading fees, so it is to their benefit to continue providing their services for as long as possible rather than just closing down whenever a hack occurs.
3. Global Access + Privacy
Anyone in the world can access a DEX as long as they have an Internet connection. No KYC verification is required for anyone to trade cryptos on DEXs.
On the other hand, CEXs are usually regulated by the country they are operating in. Thus they will usually need their users to do KYC verifications. And so if you use a CEX, your crypto assets are tied to your identity and the CEXs can be compelled by the authorities to provide details about your crypto holdings.
There are many more differences between a CEX and DEX, but the above are the basics that you need to know.
Because each type of exchange caters to 2 different sets of users, with some functions not available in the other platform, CEXs and DEXs will exist side by side.
In fact, some CEXs also have their own DEX versions. CEX Binance.com‘s DEX platform is called Binance DEX, which can be accessed at binance.org. And Kucoin.com aims to be a hybrid CEX/DEX.
Note that CEXs and DEXs provide a number of PASSIVE wealth creation/multiplication opportunities that I will be revealing soon.
Once you know what they are, you can then decide on the best mix of passive income creation methods that is most suitable for you.
More on these passive income methods will be revealed soon, so watch out for them.