We’ve taken into consideration some crucial features of Centralized Exchanges (CEXs) such as Binance, OKX, Bitfinex, Coinbase, and others, as well as Decentralized Exchanges (DEXs) like Uniswap, Kyber, Pancakeswap, DexKit trading solutions, and more, to facilitate a comprehensive comparison between the two. Let’s assess the advantages and disadvantages of each and explore why users would require both in order to become DeFi wizards 🧙♂️.
Before we delve in, it’s important to note that CEX stands for Centralized Exchange, while DEX stands for Decentralized Exchange. The primary distinction lies in their operational mechanisms, which we’ll now examine:
A CEX is operated by a central authority, typically a company. Consequently, the company exercises control over the trading platform, transactions, and users’ private information. This centralization implies that the company possesses the capability to manipulate the trading platform and, in certain circumstances, freeze or seize user funds.
In contrast, a DEX operates on a decentralized network, often a blockchain. Consequently, there is no central authority governing the trading platform. Instead, a network of users validates transactions. The absence of centralization means there is no single point of failure*, granting users complete control over their funds. Furthermore, since DEXs are built on blockchain technology, they can offer enhanced security and privacy relative to CEXs.
In simpler terms, CEX represents the traditional method of trading, wherein a centralized entity governs the trading platform, whereas DEX represents a novel approach, whereby no central entity exercises control over the trading platform, transactions, or users’ private information.
However, it's crucial to note that DEX trading does not guarantee absolute safety* 👀👇
In the case of DEXs, one risk is the potential for funds to be stolen or frozen in a liquidity pool. Liquidity pools consist of assets that users can contribute to and withdraw from in order to provide liquidity to the exchange. However, if the smart contract managing the liquidity pool is compromised, it becomes possible for funds to be stolen or frozen. Additionally, if a user employs a token bridge to connect to a DEX, they may be exposed to losses if the bridge is hacked.
Another risk is the possibility of funds being frozen or confiscated on DEXs utilizing stablecoins such as Tether (USDT) or USDC. These stablecoins are pegged to the value of a fiat currency and may be subject to government regulations and legal actions. If a user’s funds are held in these stablecoins, they may be prone to freezing or confiscation by the government. For a more secure stablecoin to safeguard your savings, DAI from MakerDao may prove beneficial.
It’s important to remember that the decentralized nature of DEXs does not render them immune to these risks. Nevertheless, DEXs can provide heightened security and privacy in comparison to CEXs by allowing users to exercise full control over their funds without relying on a central authority for their security. Additionally, the utilization of blockchain technology can make it more challenging for hackers to compromise the exchange.
Why do you need both CEX and DEX? 🤔
While it’s ideal to safeguard your valuable savings in a cold hardware wallet, utilizing a stablecoin like DAI, there will come a time when you need to sell a portion of your earnings. In such cases, a reasonably reliable centralized exchange becomes necessary to facilitate fiat trading.
It’s worth considering that DeFi platforms typically handle fiat money (through integrations like Transak, Ramp, among others), but for the end user, withdrawing funds to their bank account without the involvement of a CEX with established liquidity isn’t always straightforward.
This highlights the significance of both CEX and DEX for those aspiring to become DeFi masters 😎