With Uniswap leading the charge, the 2020 DeFi boom drew the attention of many investors to DEXs. This year, tougher policies on crypto regulation in the United States and China have also fueled the demand for DEXs. So what is a DEX, and how does it compare to a CEX?

DEX refers to Decentralized Exchange, whereas CEX stands for Centralized Exchange. There is no doubt that both of them are created to facilitate crypto transactions between users. In addition, most of the mainstream services on DEXs and CEXs overlap, including spot trading, perpetual contract, margin trading, and lending & borrowing.

Other than the few similarities, there are a lot more differences between DEXs and CEXs.

1) Different trading process

Before trading on CEXs such as Binance, Huobi, and Coinbase, the user will need to go through a basic process that covers registration, real-name authentication, and token purchase using fiat money, before he can enjoy a wider range of services, such as spot trading, perpetual contract, margin trading, and lending & borrowing.

On a CEX, all trades are matched and completed through the predetermined procedures, and all trade-related actions are recorded by the CEX database. However, if users wish to trade on a DEX, they do not need to complete registration or real-name authentication, and all that is needed is to prepare a crypto wallet. On DEXs, a user’s wallet constitutes his/her account. All user actions take place on blockchains and are recorded by blockchains, and all trade instructions are completed by smart contracts.

If you plan to store your crypto assets more safely, on CEXs, you will need to withdraw tokens to their wallets, whereas DEXs have no such requirements. On a DEX, once a transaction is completed, the user will be able to directly check the corresponding asset in their wallet. However, CEX is the better choice when it comes to the realization of crypto assets. On a CEX, to withdraw their crypto assets, users can simply engage in fiat trading, while in the case of DEXs, users may have to transfer their assets to CEX first, and then convert the assets into cash through fiat trading, which is unavailable on most DEXs.

2) Drastically different trading experiences

Without a doubt, CEXs are superior to DEXs in terms of the overall trading experience. CEXs are more established and have a more mature system, a larger user base, a greater scale of trade, a more developed market-making system, and superior market depth and liquidity. Moreover, on CEXs, transactions are more efficient and suffer less loss from bid-ask spreads caused by the lack of liquidity. These are all CEX’s advantages.

In comparison, DEXs are yet to be fully fledged with an immature market-making system and a small scale of trade. Plus, most DEXs lack market depth and liquidity, and the user experience is far worse. However, with regard to user experience, DEXs have one advantage: they do not require reviews of token listing. As such, they support more types of tokens and trading pairs than CEXs. This is especially true in the case of lesser-known cryptocurrencies that cannot be traded on CEXs.

3) Different security levels

When it comes to security, DEXs have an inherent advantage over CEXs because the users’ assets do not go through DEXs at all. On DEXs, if the user wishes to trade, he will need to log in with his wallet, identify the target trading pair, and then conduct the transaction. Once the transaction is completed, the corresponding asset directly goes into the wallet. Hence, users do not need to deposit or withdraw tokens when trading on DEXs, and their wallet is equivalent to the account on CEXs.

Even if a DEX terminates operation and goes bankrupt, the user would not be affected because the crypto assets are stored in his own wallets at all times. In the case of CEXs, things are very different. Large exchanges are subject to frequent hacking incidents due to the massive assets stored on them. In the past, CEXs have suffered multiple hacker attacks, such as the notorious 2014 hack of the major exchange MT.Gox, which resulted in the loss of 750,000 bitcoins (equivalent to $350 million). This scandal directly led to the bankruptcy of this leading global exchange. Apart from this, there have been many more well-known hacking incidents in the history of centralized crypto exchanges. For instance, in May 2019, 7,000 bitcoins (which were worth $41 million) were stolen from Binance. Again, in August 2021, $94 million worth of crypto assets were stolen from Japan’s leading exchange Liquid.

The above examples only represent a small portion of CEX hacking. Therefore, although the leading CEXs have adopted highly stringent anti-hacking measures, the risk of a security breach remains. Smaller CEXs are even less desirable in respect of security as we can see that every year thousands of them suspend operation and flee. Such risks are far more likely to flare up than the hacking risk of major CEXs. What is noteworthy is that the risks associated with CEXs always increase when crypto regulations tighten. Therefore, DEXs are clearly more secure than CEXs.

4) Different transaction fees

When the user chooses between a CEX and a DEX, in addition to the transaction process, user experience, and security, there is another major concern: transaction fees. However, this is an easy decision as DEXs have far higher transaction fees and more uncertainties than CEXs. Right now, almost all of the well-noted DEX projects are running on the Ethereum blockchain, and due to the large ecosystem of Ethereum, the network can get very congested from time to time. Besides, the market has always complained about Ethereum’s expensive gas fees. Therefore, in addition to the gas fees that vary over time, users also have to pay a 0.3% transaction fee to the DEX. In contrast, CEXs are much more user-friendly as they normally charge a service fee ranging from 0.05% to 0.2%.

Summary

To sum up, although both CEXs and DEXs have certain advantages, in reality, most users still prefer CEXs. After all, the vast majority of them are retail investors. For them, superior trading experience and low transaction fees far outweigh security. More importantly, users can avoid the potential security risks by withdrawing tokens into their wallets, while in comparison, DEX’s poor user experience and high service fees cannot be solved soon. Hence, even if the market believes in the promising future of DEXs, they still have a long way to go before they can rival CEXs.

Differences and Similarities Between DEX and CEX