Centralized (CEX) and decentralized exchanges (DEX) of cryptocurrencies: advantages, disadvantages, examples of trading platforms
Crypto exchanges play a vital role in the development of the blockchain industry by allowing participants to instantly buy, sell, exchange cryptocurrencies. When choosing a site for work, people first of all pay attention to those that offer the greatest functionality and safety.
All cryptocurrency exchanges have their own characteristics, but in fact they are divided into two categories: centralized and decentralized. Some believe that working with centralized platforms is contrary to the spirit of decentralization on which blockchain is based. However, centralization has advantages in terms of higher operational efficiency.
The editorial staff of Btcnewsweb.com considered the pros and cons of both options, their varieties and the most famous representatives.
What are centralized exchanges
Centralized exchanges (abbreviated as CEX) are managed by an organization. It is she who controls all operations, provides maintenance, development and security, similar to how it happens on a traditional stock exchange. For exchange transactions, commissions are charged in favor of a third party, they cover the costs of ensuring interaction between the buyer and the seller.
For those who are just getting acquainted with cryptocurrencies, centralized exchanges are the most convenient entry point. They often provide additional services to participants – risk control, margin trading, etc. In addition, in most cases, they support fiat, that is, you can buy cryptocurrency for traditional money.
Centralized cryptocurrency exchanges are classified according to several criteria:
✅ Spot and derivatives (futures, options). The former involves the instant transfer of funds between the buyer and the seller. The latter work with contracts, that is, conditional agreements for the transfer of funds under certain conditions and at a certain time. Contracts are either perpetual or for a specific period (expiration date). Recommended: List of cryptocurrency futures exchanges.
✅ With or without a fiat gateway. The former are convenient for entering the cryptocurrency market by simply purchasing it from a bank card or electronic wallet. However, this will have to sacrifice confidentiality – to provide passport data, going through the KYC / AML procedure.
✅ With or without shoulder. Leverage is a loan provided by the exchange itself or its users. At the expense of credit funds, you can increase your trading capital and, accordingly, under good circumstances, you can get much more profit. The loan is then returned with a certain interest. This is called margin trading. Some exchanges provide high leverage – up to 200x.
✅ Highly liquid and low liquid. If there are many participants on the exchange and a large amount of funds rotate, then it will be easier at any time to freely make the necessary transaction on it. This is high liquidity – a clear advantage for any site.
Separately, we can highlight p2p platforms, where transactions are carried out directly between users, on the terms they choose. In this case, the exchange only provides an escrow account (where money is blocked until the buyer pays) and acts as an arbiter in disputable situations. But it does not store user funds.
Advantages and disadvantages
✅ High transaction speed.
✅ Extensive trading functionality.
✅ Stable high liquidity.
✅ Industry Leading – Highest Trading Volume.
❌ Users’ funds are controlled by those who own the project.
❌ Security Threats – Despite the fact that all major sites pay a lot of attention to security, there is always a risk of hacking from the outside.
❌ Identity verification is often required. Recommended review: Exchanges without verification.
❌ The likelihood of manipulation, falsification of trading volumes. In general, the work of such sites is not transparent enough.
Below are examples of centralized cryptocurrency exchanges and a description of their main features.
BitMEX is a specialized derivatives trading platform. Provides leverage up to 100x. The company is registered in the Seychelles.
BitMEX offers the ability to buy and sell futures and perpetual contracts. Contracts for bitcoin and several altcoins are supported, but in fact all profits and losses are realized in bitcoins; you can replenish your account and withdraw money only in bitcoins. Fiat is not supported. You can buy bitcoin for traditional money through bitcoin exchangers.
Within a few months after its founding, Binance became one of the largest crypto exchanges in the world. Supports almost 200 cryptocurrencies and allows you to work with them in normal or “advanced” mode. Not so long ago, a fiat gateway was connected, which makes it possible to purchase cryptocurrency for real money from a bank card or using Advcash and Payeer wallets.
The Currency exchange differs in that it allows you to trade not only popular cryptocurrencies, but also any assets in tokenized form. Work with fiat is supported, including withdrawal of funds to a bank account. The maximum leverage for cryptocurrencies is 100x, for other assets 500x.
Using the Currency trading terminal, any investor can easily invest in cryptocurrencies or popular financial instruments. The site is registered in Belarus and fully complies with legal requirements.
LocalBitcoins is a peer-to-peer bitcoin exchange based in Finland. Supports a large number of payment methods – almost all world famous payment systems and banks. The seller creates an ad, where he indicates the BTC price and payment methods convenient for him, and the buyer selects from among the ads the one that suits him according to the terms. Then he contacts the seller and makes a deal.
LocalBitcoins provides a reputation system for building trust in a counterparty, a chat for communicating with a seller, a feedback mechanism with technical support, an escrow service and arbitration, where conflicts are resolved.
The Exmo exchange has been fully functioning since 2013 and has achieved good results in a short period. Basically, users were attracted by the simple, quick registration and the ability to purchase cryptocurrencies for fiat money or vice versa. Moreover, the exchange is not only for the dollar, but also for the ruble, hryvnia, etc. Therefore, the exchange has become one of the most popular in Russia and Ukraine.
Verification to work with the exchange is required.
What are decentralized exchanges
Decentralized Exchanges (DEX) provide the ability to trade bitcoins and altcoins without the restrictions imposed by centralized exchanges and without the involvement of third parties / intermediaries. An account on such platforms is a wallet and funds are transferred directly to or from it.
Today there are about a hundred decentralized protocols, some are still in development, and some are already in use for trading. What they have in common is that funds are always at the user’s disposal, eliminating the security issues seen in centralized exchanges.
To trade on the DEX, the client does not need to make deposits or withdrawals. Currency pairs are traded using the atomic swap technology. It can be used to exchange coins between different blockchains.
There are three main types of DEX sites:
✅ On-chain. The architecture used in the first generation of decentralized exchanges is entirely blockchain-based. Each new order or its change makes adjustments to the state of the blockchain. From the point of view of users, it is as secure and confidential as possible, but slow and expensive.
✅ Off-chain. Thanks to the 0x protocol, built on the basis of Ethereum, a new solution has appeared – while the execution of transactions takes place on the Ethereum blockchain, the order books are held by a third party, the so-called relay. At the same time, users’ control over their funds is fully preserved.
✅ Managed by smart contracts. With this scheme, reserves are controlled by smart contracts; the user can exchange with external reserves. For example, investing bitcoin in it and receiving ether in return. The smart contract in charge of trading uses an exact mathematical formula that determines the exchange rate between tokens based on an agreed mutual relationship of stable reserves.
As the volume of cryptocurrency assets grows, exchanges between them will require higher levels of speed, compatibility, and security. If the first generation DEX could not yet compete with centralized counterparts, then with the development of innovations, many problems are gradually being solved.
Advantages and disadvantages
✅ If centralized exchanges are banned, DEX will be a convenient way out.
✅ Maximum anonymity.
✅ The trader is responsible for the storage and security of his funds.
✅ Many rare or new altcoins are only available on DEX exchanges.
❌ Expensive and slow transactions on those sites where the on-chain system is practiced.
❌ Everyone can see the created transaction even before it is confirmed.
❌ Trading problems – transactions are added to the blockchain only after confirmation by miners, which is why sometimes an already executed limit order is still displayed as pending. Users try to fill it over and over, resulting in network failures for all but the very first transaction.
❌ There is no possibility to create complex orders with the support of a third party (stop loss, take profit).
❌ Cancellation of an order leads to additional costs, since each such action is verified by the blockchain.
❌ So far, liquidity is significantly less than that of CEX. Inexperienced users are more inclined to go to centralized sites, where everything is as simple and intuitive as possible.
There are significantly fewer decentralized crypto exchanges than centralized ones. The following representatives can be distinguished:
On the basis of Binance, developers have relatively recently opened the Binance DEX decentralized exchange platform. Powered by a separate Binance Chain blockchain. The ecosystem includes a platform for launching new tokens and an incubator for blockchain projects. User funds are stored in the Trust Wallet web wallet.
You can track transactions in a peer-to-peer distributed system through the Binance Chain Explorer. The native token of Binance – Binance Coin (BNB) – was transferred to it after the launch of the blockchain, previously it was an ERC20 token.
IDEX is a decentralized exchange for trading Ethereum tokens (ERC-20). To use the platform, you need to deposit funds, but here they are controlled not by individuals, but by smart contracts. Therefore, IDEX is more secure than centralized sites, but at the same time it cannot be called 100% decentralized.
This architecture is more user-friendly, which is why IDEX has a relatively high level of liquidity. It also has an IDEX utility token used to secure the network.
Kyber Network is a network protocol that enables instant secure exchange of tokens within a decentralized application. It is a set of smart contracts responsible for the exchange. The site is not technically an exchange as it does not have an order book function. Rather, it can be called a decentralized version of services for instant currency exchange. So far, it works only with ERC tokens.
Liquidity on Kyber Network is provided by the so-called Reserves – liquidity providers. The provider registers in the smart contracts of the protocol and offers its liquidity to buyers. Traders who are comfortable with these trade offers make a purchase.
To become one of the Reserves, you need to talk to the Kyber Network team and get their approval, so there is no full decentralization here either. However, once approved, the liquidity provider can fully manage its funds and set prices.
Bancor is another network where the interaction between buyer and seller is governed by smart contracts. At the same time, any supported tokens are always available for trading, regardless of the volume of the transaction. An automatic pricing mechanism is used, and the buy and sell price of any token is always the same, it is calculated algorithmically.
There is no order book, and the user interface is designed as clearly as possible so that you can sell cryptocurrency quickly and without obstacles.
Waves Dex is a project on the Waves blockchain. All commissions on this exchange are paid in WAVES tokens. The order picking process is open source but centralized. According to the project documentation, this is the only centralized element in the entire architecture.
Order matching is done by independent nodes that sign them using their private key. Once signed, the transaction is sent to the Waves blockchain and the user’s account balances are adjusted based on the amount of the transaction.
When the question arises of choosing a cryptocurrency exchange for trading, that is, approximately the same number of reasons for centralized and decentralized sites. In addition, each specific exchange has its own characteristics, advantages and disadvantages.
In the end, it would be correct to say that the choice depends on personal preference. Most often, people use centralized exchanges due to the easy work with fiat and advanced functionality, and DEX – to work with tokens that are difficult to find on popular platforms.