As you mature in your crypto trading journey, do you find yourself torn between trading on a decentralized exchange (DEX) vs a centralized exchange (CEX)? What should you know as a DEX or CEX user? Today, we are going back to the basics.
Today, exchanges remain the key platform to trade crypto and speculate. There are two main types: DEX and CEX. While CEX is the OG of crypto trading, the crypto boom and popularity of DeFi has seen speedy uptake of DEX as well.
Key differences between DEX and CEX
|Decentralized, non custodial||Centralized, custodial|
|Utilise AMM or Order book model||Utilise Order book model|
|No account registration||Require account registration|
|No KYC||Most require KYC|
Non-custodial vs Custodial
DEXs are non-custodial. This means that you trade with no intermediaries and you use your own decentralised software or hardware wallet to trade. The exchange does not hold custody over your crypto assets since it does not have access to your wallet.
In comparison, CEXs are custodial and they help you to manage your wallet. Thus, they hold custody over your assets.
AMM / Order Book Exchanges
Automated Market Maker (AMM) and Order Book models are how exchanges process transactions.
- AMM makes use of liquidity pools, which are collections of crypto tokens. When you submit a trade order, smart contracts send your tokens to the pool and swap them for the token you want. Your buying or selling price is determined by a pricing algorithm which considers the exchange ratio of the tokens in the pool.
- Order books record all buy and sell trading activity that happens on the exchange. Orders are split into two columns, with asks (sell) and bids (buy). When you submit an order, your ask or bid becomes an entry on the order book and will be fulfilled as long as there is a match.
There are two types of DEXs: Automated Market Maker (AMM) and Order Book. An example of an AMM DEX is PancakeSwap, while an order book DEX is ApolloX DEX.
CEXs typically follow an order book model. An example of a CEX is Binance.
Since DEX is non-custodial and you need only connect your wallet to a DEX to start trading, no account registration is needed.
Meanwhile, you would need to create an account on a CEX to utilise their wallets for trading.
Know Your Customer (KYC)
KYC are mandatory checks enforced by the exchange to make sure you are who you claim to be. This could include asking for your personal information and a real-time photo verification. KYCs are strongly touted as helping to prevent fraud and usage of fake identities.
Since no account registration is needed for a DEX and you have custody over your funds, naturally there is no need for KYC. On the other hand, many CEXs have implemented KYC to ensure that customer records are not falsified.
Pros and Cons of DEX
- More secure, you own your keys
- More privacy, you can trade anonymously
- No risk of personal data being leaked
- May not be as user-friendly for beginners
- You need to have your own decentralised wallet and be responsible for your own assets
- Functions that you see in CEX (e.g. set limit orders; convert to fiat) may not be available on DEXs, especially AMM DEXs
Pros and Cons of CEX
- User-friendly, CEX interfaces look like stock brokerages’
- Often support buying crypto using fiat currency
- High liquidity (how easily you can convert crypto into fiat or other assets)
- Risk of losing your funds in hacks and risk of personal data leaks
- Strict KYC policies
- May be subjected to harsh regulatory pressures, thus affecting daily operations
Look at your priorities. If you are looking for more autonomy, privacy and security, DEX should be your main mode of trading. CEX would be suitable for beginner traders or those looking for a more user-friendly interface and fast trade.
That said, DEXs are becoming more user-friendly and have expanded their range of products (i.e. yield farming, staking etc) in recent years. If you ask me, I say take some time to try a DEX out.
A Third Type of Exchange?
A new breed of exchanges, hybrid exchanges, are cropping up. Hybrid exchanges aim to combine the best attributes of DEXs and CEXs - security and anonymity of DEXs + high liquidity and usability of CEXs. ApolloX is one example, being the world’s first CEX-DEX hybrid crypto derivatives exchange. Users have the freedom of choice to trade anonymously on either DEX or CEX, or both.
While it remains to be seen whether hybrid exchanges will eventually become the dominant exchange type, they are an alternative if you want to have the best of both worlds.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
Risk Reminder: Crypto trading carries a risk. All trading activities are done at your discretion and at your own risk. The information here should not be regarded as financial or investment advice from ApolloX. ApolloX will not be liable for any loss that might arise from your use of any financial product.
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