Chapter 15

What is the difference
between a CEX and a DEX?

CEX and DEX are two terms that you will see popping up often. They are both a kind of crypto exchange, but with fundamental differences. In this chapter we explain what you need to know about this.

A CEX stands for a centralized crypto exchange, while a DEX stands for a decentralized crypto exchange.

DEX or CEX, which one is best for you?

Whether you are starting with crypto or whether you have been working with crypto for some time: We think it is important to inform you as well as possible. Which choices can have which consequences? Be aware of the differences between a CEX and DEX and decide which one is right for you.

CEX - Centralized Exchange

In the world of crypto, a centralized exchange is an online platform that allows users to buy and sell digital currencies. The platform has its own marketplace, as it were, where users buy and sell cryptocurrencies from each other. The platform makes money by charging a fee from the users of the platform.


Why are CEXs popular?

Centralised platforms are also often associated with ease of use. Often a CEX is used by a novice crypto user to make their very first purchase of crypto. In addition to ease of use, CEX is also known for a clear, user-friendly interface.

Advantages of a CEX

  • If you are going to trade via a CEX, you will automatically create an online wallet. This wallet is and will always be linked to the CEX platform on which you trade. When you log in to the CEX platform, you are also immediately logged in to your wallet.
  • A CEX manages your private keys to your wallet.
  • By unburdening a CEX, users can concentrate on trading crypto.

Disadvantages of a CEX

  • As a user of a CEX, you put the responsibility and security standards of your crypto in the hands of a platform.
  • If a CEX were to be hacked or phishing, or even go bankrupt, your crypto would be gone too.
  • You rely on a CEX, as the login keys are managed by the platform.
  • CEXs decide for themselves which crypto they want to trade, your choice of crypto to trade is limited by the choice that CEX has made for you.
  • CEXs will often not give users an early bird advantage when new crypto projects are launched. A good example is NFTs, which have only just been introduced on CEX platforms such as Binance and Coinbase despite being a popular commodity.
  • Because CEXs exist as a separate legal entity, they are subject to government sanctions and restrictions. It can be easily shut down or restricted by outside authorities. Think about this when you choose a CEX.
A DEX is a decentralized trading platform that runs on a blockchain.
DEX - Decentralized Exchange

With a DEX, no single entity is in charge of the transactions or assets. A DEX therefore only plays a facilitating role, creating a peer-to-peer trading platform and network in which every participant is part of the trading exchange itself. Preferably, there is no longer a third party with a central server. In concrete terms, this means that a well-built decentralized exchange can no longer be stopped and in fact no longer has any jurisdiction.



There are 3 key components that make a DEX a success

  1. Matching orders through algorithms.
  2. Having sufficient liquidity (i.e. prompt funding to process orders is essential).
  3. Fast transaction processing thanks to the help of a protocol such as atomic swaps. This allows users to directly set up crypto conversion requests (exchange contracts), find a match and execute the transaction.


How does trading work on a DEX?

There are two common types of models for how DEX transactions can be established. DEX trades run either with an AMM (Automated market maker) or with a traditional order book model.


What are Automated Market Makers (AMMs)?

An automated market maker (AMM) is a system that automatically facilitates buy and sell orders on a decentralized exchange. Unlike regular market makers, SMPs work with the help of self-executing computer programs, also known as smart contracts.


Explanation of the traditional order book model

The DEX traditional order book model is less popular than an AMM. The SMP has blurred the flaws of the order book model. In a traditional order book model on a DEX, a user places an order to exchange his or her assets for another. The provider of the crypto determines the number of units he/she wants to sell, the price and the time limit for accepting bids. Then other DEX users can bid by placing a purchase order. Once the seller has chosen the time, both parties evaluate and execute all offers.


Why are DEXs popular?

Developments in the area of ​​the decentralized money markets and financing sector are moving very fast. One of the reasons for this is that one can trade without any government restrictions or identity verification. With a DEX you are also less dependent on a third party, it saves costs and you always have your own capital.

Advantages of a DEX

  • In principle, trade on a DEX is faster and cheaper than on a CEX.
  • A DEX is less susceptible to hackers, price manipulation and fictitious trading volumes.
  • Every transaction you undertake at a DEX is done directly from your own (private) wallet. That is why you always have your cryptocurrency under your own management because you have stored your private key (if that's good?!) securely.
  • Users of a DEX can start trading immediately without having to sign up with a platform.
  • This means no long registration procedure where you have to share sensitive data such as your passport.

Disadvantages of a DEX

  • A DEX is user-unfriendly compared to a CEX. The convenience is much lower. For example, you cannot just deposit money, you must first connect your wallet to the protocol. This is not all that complicated, but it is less user-friendly than you may be used to from a CEX platform.
  • A DEX has no customer service. If you do something wrong, that is really your own problem.
  • It could be that the DEX protocol developers did something wrong in their programming or that there is a bug. There has often been an 'exploit' in which a liquidity pool (smart contact) has been emptied.

"Opportunity and risk come in pairs."
- Bangambiki Habyarimana

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