Centralized and Decentralized Exchanges — Which Ones to Choose?
Highlights
- Centralized crypto exchanges (CEXs) and Decentralized ones (DEXs) are the platforms where crypto buyers and sellers come together. Sellers offer coins at certain rates, and buyers agree or disagree to buy. This shapes a coin’s price.
- CEXs (Binance, Coinbase, Kraken) offer a user-friendly and fast trading experience. They have much liquidity — this makes it easy to find the price you need. But the trade goes off-chain and CEXs store your funds themselves, which imposes security risks.
- In DEXs (Uniswap, PancakeSwap), any purchase or sale goes on-chain. This makes the trade slower and more expensive (network fees for each transaction), but you keep storing your crypto in your wallet, and the exchange has no control over it.
Overview
There are two types of crypto exchanges: centralized (CEXs) and decentralized ones (DEXs). In the 2010s, CEXs emerged first: they were satisfying the need for a platform where newly appearing cryptocurrencies could be exchanged. Over the years, CEX crypto exchanges have attracted millions of users who brought a considerable amount of liquidity. Today, CEXs largely drive the crypto market forward.
Until recently, decentralized exchanges couldn’t boast of as many clients due to the low liquidity and sophisticated user interface. Also, they have a poorer choice of assets. But their main advantage is security — in DEXs, trade goes on-chain and users own private keys, so no centralized entity can control it. In the last year, DEXs like Uniswap have demonstrated a meteoric rise, and the future for them looks very promising.
In this CEX vs DEX crypto comparison, we will see how both work and explain which ones will better meet your needs.
- Security and storage of funds
Short: Centralized crypto exchanges store your coins (hence control them), decentralized ones don’t.
CEXs are like banks. You deposit some money and see them in your account, but you don’t really own it: if a bank goes bankrupt or freezes your funds, you’ll lose access to your money. To start using Binance or other exchanges, you need to sign up and deposit some coins that you won’t further fully control.
To use a DEX, you don’t need to sign up. In a blockchain decentralized exchange, users buy and sell cryptocurrency between a wallet and a liquidity pool. Your coins stay on the blockchain, and you have full control over them.
Decentralized exchanges are more secure than centralized ones. If a CEX is compromised, your money may be stolen. In a DEX, this is impossible. However, good CEXs guarantee the security of funds with sophisticated cryptography.
2. Speed of exchanges and the choice of coins
Short: CEXs offer instant trades and a good choice of assets. DEXs are slower and only offer tokens from one blockchain.
In centralized exchanges, it takes 1–2 seconds to execute a trade order if you offer a good price. It’s so fast because the transactions are not recorded in the blockchain: they all take place in the internal space of an exchange. A downside to this is that you don’t really control your coins. Also, since CEXs are not based on one blockchain, they offer trading assets from many blockchains. For instance, Binance allows trading 500+ coins and fiat currencies.
In DEXs, every trade order is recorded on the blockchain, hence you have to pay a network fee and wait until the block is mined and confirmed several times. This makes crypto decentralized exchanges in some way less user-friendly than CEXs. Also, since a DEX is based on one blockchain (most often, Ethereum, Binance Chain, or Binance Smart Chain), it only allows trading currencies based on this blockchain. As you don’t have to sign up and deposit, DEXs are more secure than CEXs — no hack can happen resulting in a money loss.
3. User interface and liquidity
Until recently, CEXs were known for an easy interface, a big user base, and large liquidity compared to DEXs. It’s easier to build an off-chain trading tool: on-chain infrastructure is much more complicated. CEXs managed to attract many users with significant liquidity, which means the more traders you have, the more competitive prices you can offer.
For a long time, DEXs were far behind CEXs in terms of usability and liquidity. However, in the last 2 years, the concept of a liquidity pool and other tech advancements let decentralized exchanges bring $Billions of liquidity and attract millions of new users. To see how, let’s overview the trading algorithms of CEXs and DEXs.
4. Order books vs. automated market making
In crypto exchanges, buyers and sellers meet to agree on a trade price. In centralized exchanges, BUY and SELL orders are recorded in an order book. In Binance, it looks like this:
Those who place SELL orders are like merchants in a grocery store: they put their “goods” on the “shelves” of an order book. They are called market makers. Takers are those who place BUY orders: criteria for goods to satisfy their needs. An algorithm called a matching engine matches these orders, and that’s how they get executed.
All this happens in mere seconds. CEXs created a fast off-chain trading tool and attracted many market makers, hence high liquidity (many “goods” on the “shelves”) and competitive prices.
Decentralized exchange architecture can’t afford tons of market makers: an order book with many orders would quickly congest the blockchain, making the trade ineffective. However, they still need high liquidity to offer competitive prices. How do they solve this problem?
Getting rid of the order book bottleneck
0x Protocol founded in 2016, a system of peer-to-peer exchange on Ethereum, brought the order book off the blockchain. In 2018, the Uniswap decentralized Ethereum exchange went further — it got rid of the order book whatsoever. Instead, the Automated Market Making concept was introduced.
In AMM, there are no BUY and SELL orders that are being matched. Let’s say, a user wants to swap ETH for DAI. They send their ETH to a smart contract-based ETH/DAI liquidity pool and get some DAI from this pool in return. This pool gets filled by liquidity providers (LPs), counterparts to the CEXs’ market makers. To attract LPs, Uniswap offers rewards: whenever a user swaps tokens in a pool, they are charged a 0.3% fee that gets distributed among the LPs.
The better liquidity a pool has, the better prices it can offer. In CEXs’ order books, an asset’s price is determined by the balance of BUY and SELL bids. In Uniswap’s AMM, the price is determined by the balance of two tokens in the pool. The bigger is the quantity of these tokens, the easier it will be to achieve the balance between the two.
Should I choose a centralized or decentralized crypto exchange?
This has been quite a load of information on centralized vs decentralized crypto exchanges — now, let’s put it all together.
If you strive for high trading speed, a large choice of assets (including Bitcoin), and simplicity of the service — choose centralized exchanges like Coinbase. If you’re good trading tokens on the Ethereum or BSC blockchains, and security is the top priority for you — try Uniswap for Ethereum and PancakeSwap for Binance Smart Chain.
If you simply need to swap two coins and don’t want to spend time getting used to the interface, try ChangeNOW. We will walk you through the quick 4-step exchange process where you can swap over 200 coins without registration. See what rates we offer here.
