Centralized vs decentralized token exchanges: what’s the difference

Today trading cryptocurrencies is done in several ways. The easiest one is to leverage token exchanges. However, one should know that now we have two types of them: CEXs and DEXs. Read on to see what they are and how they are different.

Brief guide through CEX and DEX

In order to manage your funds wisely, you should be 100% confident in the way you trade your crypto. The below info we’ll help you distinguish what option will match your preferences best.

Centralized token exchanges: definition

A centralized exchange like Binance or Coinbase is a website or app where people can buy, sell or exchange cryptocurrencies and tokens listed on that exchange.

Let’s say you want to buy Bitcoin.

You can go to the exchange and do the following:

• register with your bank details;
• identify information;
• deposit some cash. 

Sometimes this process takes several days, which is one of the downsides of centralized exchanges compared to DEXs. 

The exchange will tell you the price – based on the “order book” of people buying and selling for different amounts – and you can complete the transaction.

What’s behind the decentralized token exchanges?

A decentralized cryptocurrency exchange (DEX) is a platform based on a distributed ledger. Such a crypto exchange does not store money and personal data of people on its own servers. All that the exchange does is look for matches on requests for the purchase/sale of coins. Users trade on such sites directly, without financial intermediaries.

Decentralized exchanges allow people to exchange cryptocurrency tokens directly with each other. In other words, a decentralized exchange or DEX is a place where people can trade without an intermediary. 

CEX vs DEX: core differences

The principles of operation of DEX and CEX are fundamentally different, although visually the trading functionality is similar.

A centralized exchange works much like a bank. You deposit cryptocurrency, and the exchange stores it and uses it for its own purposes, fulfilling your requests for withdrawal or exchange of assets if necessary. 

Users of a centralized exchange do not have their own private keys, as happens when working with a crypto wallet. From the point of view of the blockchain, the owner of the funds is the exchange. And already within it, assets are distributed among users.

In the case of a decentralized exchange, the site does not store funds. Typically, there is a protocol for order matching, and funds are transferred between individual wallets using smart contracts. The underlying mechanisms may vary. For example, AMM (Automatic Market Maker) can be used instead of orders.

Summary

The DEX concept is still evolving. Against the backdrop of incidents with centralized exchanges, users are paying more and more attention to decentralized exchanges, recognizing their advantages.

It is possible that in a few years these platforms will leave CEX far behind. It can also be noted that, in general, DEXs fit much more logically into the ideology of blockchain and cryptocurrencies, which are initially based on decentralization and independence.