What is the difference between centralised and decentralised exchanges?

What is the difference between centralised and decentralised exchanges?

Centralised exchanges and decentralised exchanges are two different types of cryptocurrency exchange. The overall difference is in the core structure – a centralised exchange is owned by a central authority, a decentralised exchange is instead owned by the users collectively.

In this article, we will cover the main differences between centralised and decentralised exchanges and the benefits of each so you can decide which one might be best for you.

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What is a centralised exchange?

A centralised exchange (CEX) is a form of cryptocurrency exchange that has a centralised authority which runs the exchange. 

You can see our list of the best crypto exchange providers in 2024 for some of the most well-known CEXs currently on the market.

A CEX works in the same way that a bank or central authority works. The company will store the users’ information and funds and distribute them when necessary. 

Advantages of a centralised exchange

Some of the most common and popular methods of trading crypto are on platforms such as Binance and Coinbase, which are both CEXs. 

The advantage of these platforms is that they are generally more user-friendly. CEXs can dedicate more money to improving customer experience, so typically the platforms are more intuitive. They will also come with extensive customer support services to help users with issues that they might have.

CEXs generally have faster transaction speeds as well as a range of trading tools, such as stop-loss orders, margin trading and other products. Often they will have more cryptocurrencies available.

Disadvantages of a centralised exchange

CEXs may have increased security measures, but they are frequent targets for hackers due to the large amounts of cryptocurrency that they hold in a single place. The fact that all of the users’ funds are collected into one ‘pot’ means that a security breach can have serious consequences.

Users are even at risk from the CEXs themselves, as evidenced by the FTX crash. Misappropriation of funds has happened frequently in the past, and users have no knowledge of this until there is a crash.

Compounding this problem is also the fact that users don’t have direct control over their cryptocurrency. As a CEX will handle the users’ funds, they can often control and manipulate users into making certain decisions. Many users choose to avoid a hot wallet and choose a cold wallet instead – to ensure that they have control and ownership over their own cryptocurrency.

However, by virtue of using a CEX, the user is handing over their funds to a central authority, which many feel is counterintuitive to the vision of cryptocurrency.

It should be said that after the demise of FTX, many CEXs have opted for dynamic insurance protection schemes, for example, Bitget’s Protection Fund. With this model in place, a specific part of all assets are held in an insurance fund, which can then be used to refund customers, if the worst should happen.

What is a decentralised exchange?

A decentralised exchange (DEX) is a newer model of exchange whereby all users will stake a small portion of their cryptocurrency into a crypto liquidity pool. Users can also choose to stake more of their assets in return for liquidity pool (LP) tokens.

This creates a different method of exchange where users are directly trading with each other and contributing to the system, but there is no central authority. For many advanced crypto traders interested in the philosophy of cryptocurrency, DEXs are the platform of choice.

Advantages of a decentralised exchange

Without the central authority, all transactions are made between users via smart contracts, which massively increases security. With a DEX, the transactions are peer-to-peer, and no trades can be misappropriated. Users retain control of their private keys and in return their funds.

DEXs are also at the forefront of cryptocurrency technology, and users will gain access to many innovative products – for example, PancakeSwap’s NFTs, gaming products and lottery. 

Users can earn through DEXs with staking, which is becoming considerably more advanced – such as with Uniswap’s introduction of Hooks in Q3 of 2024, an entirely new concept of customisable smart contracts within liquidity staking.

Disadvantages of a decentralised exchange

DEXs are generally less user-friendly and require a bit more expertise on cryptocurrency in order to be used effectively. There is also limited customer support, as there is no central authority managing the platform.

However, platforms such as PancakeSwap and Sushi are consistently working towards a more user-friendly experience and branding complex financial products into much more digestible formats.

DEXs are also objectively slower with orders. This is because trade calls have to be confirmed by the network in order to be filled, which means that a trade via a DEX is more likely to fail. Trading with DEXs can also be more expensive due to the higher gas fees required.

Conclusion

CEXs and DEXs both have advantages for traders, and savvy traders often use a variety of platforms for different reasons. This is also wise due to the failure of several key cryptocurrency exchanges in the last few years, so it is best to not store all of your cryptocurrency into one exchange.

For a quick, user-friendly experience with rapid trades, then a CEX is a good option for many beginners. There will be a wide variety of tools to assist with your first trades, as well as high liquidity to execute those trades. For those looking for a more advanced experience, which is much deeper in the cryptocurrency world, then a DEX is the ideal choice, and users will have total control over their assets.

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