The cryptocurrency space has evolved beyond most people’s imagination. In the early days of cryptos, people would pay thousands of bitcoins for something as cheap as a pizza.
Today, Bitcoin has broken past many record levels and a person may buy more than a thousand pizzas for just one BTC. With this rapid evolution of Bitcoin and other cryptos, crypto exchanges have evolved too.
Earlier, the exchanges lacked liquidity and it was not as easy to either buy or sell cryptocurrencies. The situation was such that in February 2012, one of the major crypto exchanges TradeHill had to shut down after someone withdrew $100,000 from their exchange without prior warning.
The exchanges today wouldn’t even be bothered by such a small transaction. At present, the daily trading volume on all digital asset exchanges combined reaches more than $100 billion.
Two types of exchanges contribute to this volume: centralised exchanges, or CEX, and decentralised exchanges, or DEX. Let’s see what they are.
DEX vs. CEX
Decentralised exchanges are peer-to-peer exchanges where traders interact directly with each other and trade digital assets. There are no intermediaries who either control the funds or the transactions.
On the other hand, centralised exchanges operate on a centralised system where the platform has a central order book and it controls all transactions and the flow of funds.
A comparison between both these exchanges will render a clearer perspective of how they operate.
- Operation process
Decentralised exchanges are, well, decentralised. They do not have any central entity controlling their operations. Although in some cases, DEX creators may keep a few components of a DEX centralised to exercise some form of control over the exchange’s operation in adverse situations.
Centralised exchanges are more like stock trading platforms where a central entity controls the order book as well as the transactions. The users do not really own the assets as long as they’re stored on the exchange.
Both DEX and CEX have certain security flaws, but CEXs have been infamous for hacks worth millions of dollars. Last year, one of the world’s largest exchange Binance was hacked and funds worth more than $40 million were stolen.
DEXs are more difficult to hack as users own their crypto wallet keys and they have full control over their funds. So, as long as individual users safely store their funds in the wallet, there’s little to no chance of a hack on a DEX.
Also, there are no KYC requirements on a DEX while most CEX requires KYC for regulatory compliance.
A DEX does not provide as many features, graphs, tools, and currency support to their users as compared to a CEX. Due to these minor drawbacks of a DEX, they often have low liquidity. A CEX, on the other hand, offers great liquidity and traders do not have to wait for trade settlement.
- Currency support
Traders on CEXs get a wide range of cryptocurrencies to choose from. On a DEX, the options are often limited to a few cryptocurrencies. Besides, many centralised exchanges also support fiat transactions and direct trading of fiat-crypto pairs. The same is not found in decentralised exchanges.
Both CEX and DEX have their advantages and disadvantages. Many blockchain proponents believe DEXs better suit the primary value proposition of blockchain and crypto space as they are decentralised. For now, however, CEXs will keep seeing the majority of the trading volume due to their ease of use and technical features that DEXs don’t yet offer.