What’s a CEX and What’s a DEX? The world of cryptocurrency is full of jargon and buzzwords which can be confusing and intimidating for those...

What’s a CEX and What’s a DEX?

The world of cryptocurrency is full of jargon and buzzwords which can be confusing and intimidating for those, not in the know. Some of them you can guess while others are a little more involved. Today, in very simple terms, we will explain to you the difference between two very important terms that you will need to know and understand if you wish to begin crypto trading. For a more detailed explanation, visit: https://www.comparebitcoinexchange.com/what-is-the-difference-between-centralized-and-decentralized-exchange/

• What is a CEX (Centralized Exchange)

• What is a DEX (Decentralized Exchange)

• How are they different

So, let’s get started with a centralized exchange. This is the type of exchange that most of us would be used to - think Binance, Coinbase, or Kucoin. This type of exchange is run as a business and makes its money from charging various fees. It is what we call a custodial solution. What that means is that you transfer either crypto or cash to the exchange and they hold it in your wallet on the exchange while you use it to trade. While it is on the exchange you really don't own it - not your keys, not your coins. Only after you have withdrawn the crypto or cash into your own private wallet or bank account is it truly yours. 

The next important thing is that most centralized exchanges will want to ensure that they are legally compliant and for this, there are KYC (Know your Customer) requirements. To join a centralized exchange you will need to divulge some personal information such as name, address, phone number, and perhaps even more. 

Finally, we should look at the method by which your orders will be filled. A centralized exchange uses what is known as an order book to match buyers and sellers. In simple terms, if you are buying you can bid on a token at the price you wish. If you are selling then you can place an offer and ask for the price you want to receive. Where these prices meet will be the market value at any given time of a cryptocurrency.

Let’s move on to a DEX or decentralized exchange now. Decentralized Exchanges rely on a network such as Ethereum or Solana or others that are able to run smart contracts. The contracts are written to execute without the need for a central authority. The first benefit of this is that you are able to connect with the exchange through your own wallet such as Metamask. This makes them non-custodial. Your coins remain in your possession unless, of course, you are in the process of executing a trade. Given the numerous exchange hacks and exit scams that have happened over the years, this feature is enough for many people to wish to exclusively trade on Dex’s. 

Next, as the Dex is not run by a central authority (some are controlled by DAO’s or governance tokens), there should be little to no KYC requirements to use them. However, as regulators look to clamp down on what they consider the wild west of crypto, expect some changes in this area in the future.

Finally, the way that orders fill on a DEX is slightly different than on a centralized exchange. DEX’s uses an AMM or Automatic Market Maker which relies on liquidity pools of paired tokens and based on a set of parameters can adjust to market price without the need for human intervention. The intricate details of how an AMM works are best left for another post, but let's say that they are not perfect and if not coded properly may be open to exploitation.

Although there are more differences between the two, we feel that these are the most important ones to mention when trying to understand the difference between a CEX and a DEX - custodial versus non-custodial, KYC compliant versus no KYC compliance required, and order book versus AMM. Good luck and trade safely.