The Difference Between Centralized Exchanges (Cexs) And Decentralized Exchanges (Dexs)

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The rapid rise in the use of cryptocurrencies has prompted the availability of platforms to buy, sell, and swap various cryptocurrencies. The platform through which these operations are carried out is called a “crypto exchange”. There are numerous crypto exchanges. A few examples include Binance, Uniswap, and Kraken.
These crypto exchanges can be classified into two types: centralized exchanges and decentralized exchanges.
The Centralized Exchange is a platform through which cryptos can be bought, sold, and even exchanged with the use of a recognized intermediary. Centralized exchanges allow the use of fiat currency for their exchanges. On the other hand, the Decentralized Exchanges similarly allow buying, selling, and swapping cryptos, but through an automated system without an intermediary or a middleman.
The involvement of the intermediary in centralized exchanges, also known as the middleman, leads to an increase in the cost of transactions. The middleman collects a fee for transactions. The cost of using the decentralized system is quite cheaper due to the elimination of the intermediary fees. The cost is generated from the automated system put in place to organize the trading of crypto assets.

The intermediary that exists in a centralized exchange requires that users of cryptocurrencies and investors provide documents and identity cards for recognition. These documents are known as “know your customer” (KYC). Since the decentralized system has no intermediary, there is no requirement for these documents or identity cards.

The intermediary holds the crypto assets for investors in the centralized exchange. This means they are in charge of the security of the investors’ or traders’ crypto assets. This is different from the decentralized exchange where the investor holds his crypto assets. Only such an investor has access to their crypto assets with specific codes, keys, or passwords.

This has both an advantage and a disadvantage. In a situation where a crypto owner loses access to his crypto assets in a centralized system, the intermediary can provide access to such a crypto owner. In the case of an investor or trader who uses a decentralized system, such a person has no intermediary to help provide access to their crypto assets. Hence, he faces the danger of losing the cryptocurrency.

The disadvantage of having an intermediary hold the crypto assets is that they become quality targets for hackers. If their security gets breached, hackers can cart away a large number of crypto assets from the intermediary that holds a lot of investors’ assets.
Due to the involvement of institutional and large investors, centralized exchanges possess large liquidity. Many large investors can use centralized exchanges due to regulations binding investors that make them decline from using decentralized exchanges, like the requirement to provide a means of identity to avoid money laundering. Little liquidity is a disadvantage for decentralized exchanges as it leads to the expense of slippage. Mechanisms are being put in place to solve this challenge for decentralized exchanges.

Centralized exchanges come with a middleman, a higher cost of operation, a prime target for attackers, more liquidity for trading, and a requirement for traders to get identified. Decentralized exchanges come with an automated system for exchanges, a lower cost of operation, lower liquidity, and individual security, which seems safer. Examples of decentralized exchanges include Uniswap, Zigzag, and Pancakeswap. Examples of centralized exchanges include Binance, KuCoin, FTX and Kraken. The choice of crypto exchanges depends on the features that fit the investor, as both have their pros and cons.

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