Decentralized Exchanges (DEX) vs. Centralized Exchanges (CEX): Which Is Better for You?

Learning about crypto can take a lot of time and patience, but it’s all gearing you up for where the magic happens: the crypto exchange. 

Exchanges open the doors to trading, but like most aspects of cryptocurrency, there isn’t one exchange that rules them all. Centralized (CEX) and decentralized exchanges (DEX) are the most popular variants, and as their name suggests, the biggest difference between them is whether they implement true decentralization. 

This is only the tip of the iceberg, though, as there’s plenty that separates the two, which makes them appealing to very different types of crypto investors. 

What Is a Crypto Exchange?

Cryptocurrency exchanges are trading platforms that allow investors to buy, sell, and exchange cryptocurrency on the live market. 

You can think of them as the crypto equivalent of stock exchanges since they work almost identically and serve the same purpose.

As we all know, crypto prices are known for being volatile, so exchanges provide users with a platform to monitor them and make quick trades when needed. 

Crypto exchanges can function on desktops or mobile apps and often have unique features and functionalities to differentiate them from their peers. They also have their own fee system, which determines how much money, if any, needs to be paid when moving around crypto to compensate for the exchange’s services. 

Where Are Assets Stored On a Crypto Exchange?

Whenever you make a trade or purchase on an exchange, your earned funds will be sent directly to your wallet. 

Most custodial exchanges feature built-in wallets that often appear in the main dashboard. In the case of decentralized exchanges, though, you will need to set up your external self-custody wallet, so make sure to do this before interacting with exchanges. 

Decentralized Exchanges vs Centralized Exchanges: Key Differences 

Although they may be designed for the same purpose, decentralized and centralized exchanges are different in almost every other way, from security to fees to their user interfaces. 

Control and Custody 

As mentioned earlier, custodial exchanges usually provide users with their wallets, though this will always be custodial. This means your private keys, which are used to execute transactions, will be held by the exchange themselves. 

On the one hand, this means there’s always a backup in case you lose access to your funds, but it also forfeits a certain amount of ownership since you aren’t technically the sole owner of your assets. 

Decentralized exchanges give users the freedom to choose their own wallet, but if it’s non-custodial, the holder assumes full responsibility for protecting their private key without any external support or backup.

Security 

As the name implies, centralized exchanges are all compiled into one central authority. The security risk here is that this acts as a central point of failure, so if a hacker exposes the database, they could access everything. 

It does need to be prefaced that, since this danger is well known, many centralized exchanges take extra measures to beef up security. Secure password hashing, address whitelisting so withdrawals can’t be made to the wrong person, and two-factor authentication are a few examples of such safeguarding techniques. 

Decentralized exchanges don’t have this single center point since traders will exchange crypto assets wallet to wallet. This means a hacker would need to expose people’s wallets one by one, which is too time-consuming, making these exchanges the safer option overall. 

Liquidity 

Liquidity is a fancy way of describing how easily and quickly traders can buy and sell digital assets. 

This is where decentralized exchanges have tended to struggle since they are bound to liquidity pools – a collection of crypto for users to buy and sell with. Therefore, depending on the pool’s current contents, they can offer lower liquidity. 

There have been some methods of trying to negate this issue, such as using Automated Market Makers (AMM), but tools such as this one are still in early development. 

Centralized exchanges benefit from bigger user bases, greater access to different trading pairs, and established reputations due to a longer market presence. This leads to higher liquidity overall. 

Speed

Decentralized exchanges rely on the blockchain for stability, meaning that if the blockchain encounters congestion issues, it will affect the exchange’s speed and services. 

Remember that the speed at which you can execute transactions and receive funds will differ from network to network. 

Overall, centralized exchanges are faster and often offer instant trading, which can appeal to day traders and those wanting to take advantage of fluctuating prices at a moment’s notice. 

Fees and Costs 

Because centralized exchanges require plenty of manpower to keep them up and running, things like withdrawals and deposits must be paid to compensate for this. The saving grace is that since centralized exchanges possess a lot of liquidity, their transaction fees usually aren’t too bad overall but will vary depending on the exchange. 

Decentralized fees are lower overall since smart contracts fully automate most processes. While they often come with minor fees, these cheaper offerings help balance the liquidity issue. 

Regulation 

Regulators within crypto are supposed to act as guardians – protecting users from scams and risks by ‘legitimizing’ an exchange as verifiable. 

Saying they are controversial would be an understatement, though, considering they would have the utmost control over an exchange, which, for many people, betrays the whole purpose of crypto being decentralized. 

Centralized exchanges tend to be regulated, meaning they can be prohibited from certain areas and could even be meddled with or altered by the regulator. However, this also provides confidence that the exchange will last in the long run and makes it easy to discern whether it’s reliable.

By not having regulators, decentralized exchange users never need to worry about their precious exchange being clamped down. However, they must also ensure the exchange is eligible in their country since this can be harder to determine. 

Pros and Cons of Decentralized Exchanges and Centralized Exchanges

You may have started leaning towards one exchange over the other by now. Here are some of the main benefits and drawbacks for each of you to help you make this decision. 

Pros of DEXs

• Quick to Set Up: No KYC or Anti-money laundering (AML) procedures make signing up for decentralized exchanges quick and easy. Most of the time, you’ll need a crypto wallet address, and you’ll be good to go. 
• Security: Hackers find it much harder to expose users on a decentralized exchange since there is no centralized entity to attack. 
• Full Ownership: A decentralized exchange won’t be responsible for holding a user’s keys or funds, giving token holders full ownership and responsibility for their assets. 
• Lower Costs: Contain fewer overhead expenses passed down to the investors. 

Cons of DEXs

• Limited Functionality: Decentralized exchanges usually lack the extra features of CEXs. For example, margin trading, limit orders, and advanced charting tools are harder to find in DEXs than in CEXs. 
• Blockchain Dependency: Investors who require instant access to markets to execute fast trades may face problems with DEXs since their speed and stability depend on blockchain technology. 
• Lower Trading Volume: This can especially affect larger orders, where you might struggle to find someone to take them or are forced to accept an offer with a poorer rate. 
• Lack of Legal Clarity: It can sometimes be tricky to ensure whether a decentralized exchange is legal in a specific region. If it turns out that it has been banned in that country or region, this can lead to legal issues. 

Pros of CEXs

• Ease of Use: Centralized exchanges are very popular, especially among crypto newcomers, so they tend to have user-friendly interfaces and plenty of additional resources, customer support, and tools to help users familiarize themselves with the platform. 
• High Liquidity: The popularity of CEXs means they can handle larger transaction volumes quicker. 
• Wallet Security: Centralized exchanges with built-in wallets can provide a backup in case you lose access to your funds. 
• Fiat Functionality: Centralized exchanges usually allow investors to deposit and withdraw using traditional finance and crypto on the same platform. 
• Legal Clarity: A centralized exchange’s regulatory status indicates whether it’s legal and reliable. Clear regulation can also help users in certain countries fulfill their tax obligations for crypto holdings. 

Cons of CEXs

• Hacking Vulnerability: The central point of a centralized exchange is an appealing target for hackers, as has been shown numerous times before. Centralized exchanges also rely on employees who can make mistakes and open the door to cyberattacks. 
• Lack of Ownership: Exchange wallets can act as backups but possess private keys, meaning you must sacrifice some ownership of your user funds. “Not your keys, not your crypto.”
• Stringent KYC Policies: Know Your Customer (KYC) is a login feature that requires users to provide several pieces of personal information to sign up. Not everyone feels comfortable sharing this much information, which can slow down the login process. 
• Higher Costs: Alongside trading fees, all other fees on centralized exchanges tend to cost more to compensate the employees behind the scenes. 

Examples of Popular Crypto Exchanges 

Now that we’ve covered the basics of what makes decentralized and centralized exchanges, let’s look at some popular examples to see what unique aspects they bring.

Popular DEXs

• Uniswap: Based on Ethereum (ETH) blockchain, enhanced privacy.
• SushiSwap: Profitable limit orders, staking and lending functionality.
• StealthEX: Prioritizes anonymity, supports over 1,400 assets.
• PancakeSwap: Low fees, staking massive variety of pools.

Popular CEXs

• Coinbase: Most active participants, user-friendly, streamlined interface.
• Binance: Supports more than 500 cryptocurrencies, including Bitcoin (BTC) and altcoins, with high trading volume.
• OKX: High liquidity, supports over 43 fiat currencies. 
• Kraken: Heightened security, low fees, NFT marketplace.

Can You Trade Other Assets on Crypto Exchanges?

This depends on the exchange, but yes, it is possible.

Exchanges like Uphold, for example, allow users to buy and sell crypto alongside precious metals, stocks, and commodities. 

These exchanges are a little more complicated to navigate, but they are also useful for diversifying their portfolio with a range of user assets alongside crypto. 

Such exchanges have received backlash from big shots in the multi-asset ecosphere, such as Guillaume Paillat of Aviva Investors. According to him, the problem with storing crypto alongside other assets is that “The volatility is so unstable it is difficult to mix with other traditional assets like bonds and equities.”

Honestly, though, this is only being said because crypto isn’t definitively regulated…yet. Since it’s becoming increasingly more recognised and accepted, mixing crypto in a portfolio doesn’t have to be a bad idea.

What Type of Exchange Should I Use?

Decentralized and centralized exchanges often appeal to investors of specific experience levels. 

Crypto beginners who want easy market access will benefit from centralized exchanges with easygoing interfaces, additional educational tools, built-in wallets, and full legal clarity.

Decentralized exchanges emphasize security and giving users full ownership, which is what many advanced traders prioritize. 

That said, don’t be afraid to choose one over the other for specific features, such as low fees or the amount of supported crypto they offer. If a CEX or DEX catches your eye for its unique functionalities, it’s still worth trying.

On the Flipside

• Despite their namesake, decentralized exchanges are under threat of becoming more regulated, especially through KYC, which is becoming more commonly implemented. 
• In contrast, centralized exchanges can never escape the threat of cyberattacks, no matter how many security measures they introduce. 

Why This Matters

Simply put, if you want to trade crypto, you’ll need an exchange, whether centralized or decentralized. 

As we’ve seen, both exchanges are drastically different when you get into the finer details, and since you’ll be using them so frequently, it’s well worth doing some research before landing on one or the other. 

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