2021-11-08
Centralized vs Decentralized Exchange
Many of us have heard about cryptocurrency and many have probably traded cryptocurrencies. When we were trading, there is a chance that we were unaware of the trading platform that we were using. We might have known that cryptocurrencies are decentralized system, without involving any third party or middleman. However, some of us probably did not realize that the trading platform that most people use are centralized. In this article, we will study both Centralized Exchanges (CEX) and Decentralized Exchanges (DEX).
Centralized Exchanges (CEX) refer to exchanges which have a central authority or a ‘middleman’ that facilitates the transactions on the platform. In some sense, such platforms are similar to the current financial systems that we have aside from the assets that are being traded. Both buyers and sellers trust the platform to facilitate transactions and the security of those transactions. While the platforms provide liquidity by matching buying and selling price through order books, and provide different kinds of trading such as futures, margin, and spot.
Examples of CEX are Binance, Coinbase, Robinhood, Luno and FTX.
Decentralized Exchanges (DEX) refer to exchanges where participants trade with each other without any intermediaries. Transactions happens directly between buyers and sellers through smart contracts that are transparent. Typically, DEX allows exchanges between cryptocurrency pairs that are built upon the same network.
Examples of DEX are Uniswap, Pancake and Sushi.
The following table compares between both exchanges.
| Centralized Exchange | Decentralized Exchange |
|---|---|
| Facilitated by third parties | Facilitated by smart contracts |
| Multiple trading options | Spot trading only |
| High liquidity | Low liquidity |
| Trades through order book | Trades through peer-to-peer connection |
| Limited cryptopairing options | Large cryptopairing options |
| Allows for fiat currency transfer | Only cryptocurrencies trading |
| Fast transaction | Transaction time dependent on blockchain network |
| Very low transaction fees | Gas fees can be very high |
| Trading can be manipulated by the exchange | Fully transparent trading |
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