Have you heard about CEX and DEX?
When it comes to transacting with digital assets, many are confused by the sophisticated concepts of Centralized Exchanges (CEX) and Decentralized Exchanges (DEX). CEXs clearly enjoy the advantages of being pioneers in the sector, but DEXs, with their ability to eliminate financial intermediaries, are preferred by cryptocurrency maximalists.
The term "centralized" refers to the intervention of intermediaries, in this case, the exchange platforms that coordinate trading activities between sellers and buyers on a large scale (Bitget, Coinbase, Binance, etc.). The decentralization process removes the security and guarantee offered by registered companies, leading to DEXs, where freedom comes with great responsibilities. Exchanging fiat for cryptocurrencies and vice versa is easy in CEXs, while DEXs generally do not support fiat.
Trading experience in CEX vs DEX
DEX users retain their own private keys and personal information; KYC compliance is not required. There are two types of DEX: those with an order book system (LoopRing, Gnosis Protocol, or IDEX) and those that use innovative automated market makers (Uniswap was the first to adopt this model). DEXs can list more trading pairs since the listing process is not as demanding as that of CEXs.
Despite the rapid evolution of Decentralized Finance (DeFi), CEXs remain enormously popular due to their high liquidity and security. CEXs use the order book system to match buy and sell prices, which means that the more orders there are, the greater the market liquidity. CEXs also offer fiat cryptocurrency trading pairs and act as collateral for the completion of transactions. They are especially easy to use for beginners: most individual investors made their first cryptocurrency transactions directly, or simply put, with their credit cards. Bitget is an excellent example of major centralized exchange platforms, with 2 million users (8000 of whom are active daily) and ranks third globally in terms of liquidity.
The dispute between CEX and DEX
CEXs have existed since the early days of cryptocurrency trading and their popularity has undeniably remained higher. However, the rise of smart contracts offers traders another option with the key differences outlined below.
Operating features
As previously mentioned, CEXs use the order book system and most DEXs use automated market makers (AMMs) to facilitate trades. In the order book system, all orders are collected and classified dynamically, that is, in real-time, by price. Offered or bid asset lists, as well as order history, are available to all traders, facilitating price discovery and market transparency.
AMMs take an innovative approach to price matching. Instead of relying on current orders for liquidity and trade execution, DEX users will interact with a liquidity pool created by smart contracts. Anyone can deposit their cryptocurrencies into a liquidity pool and contribute to the system for incentives. The asset pricing formula is mathematically determined by a constant product function.
DEXs are still behind CEXs in terms of functionalities. One of the biggest challenges for DEXs is the ability to place conditional orders, which can substantially drive the dynamic pricing function in the decentralized finance (DeFi) sector. Bitget, as a leading exchange in the cryptocurrency sector, offers not only the functionality of limit orders but also trigger orders. Additionally, those who choose DEXs lose the advantage of liquidity and the convenience of fiat transactions in CEXs.
Transaction fees
Transaction fees in CEXs are usually predetermined and vary only between different trading products. The fee for Bitget for spot trades, for example, is 0.01% of the order value, but it is reduced by 20% if paid with BGB, the platform's native token.
Trading volume
Trading volume measures the level of activity on specific platforms, serving as an indicator of the adoption of CEX and DEX. Despite the rapid expansion of the DeFi sector and DEX protocols since 2019, it is still very early: at its peak, monthly spot volume on DEXs only accounted for approximately 19% of monthly volume on CEXs.
Risks
Trading on CEX and DEX carries different risks, as outlined below:
a) CEX: The only concern for CEX users is their custodial wallet. The exchange holds the private key for all users' wallets, so they should feel comfortable leaving their assets on the exchange. However, this also means that their wallet is less susceptible to hacking attacks, and even in the worst case, they can generally claim the insurance offered by CEXs to compensate for the loss.
b) DEX: There are several issues with DEX that need to be addressed, including:
blind signing (contract approvals unknowingly)
lack of liquidity
Lack of fiat on-ramps
impermanent loss: when the value of liquidity providers' assets is lower upon exit
slippage: the price difference between the price you send and the price confirmed on the blockchain
hacks, bugs, lack of insurance.
