📌CEX or DEX? Binance or Uniswap? Don’t Launch Your Own Token Before Reading This!

Introduction: Why Are There Different Types of Exchanges?

Previous Part: Here

If you’re new to crypto, one of the first things you’ll come across is exchanges. You’ll need an exchange to buy, sell, or trade cryptocurrencies. But here’s where things get interesting, there are two main types of exchanges: Centralized Exchanges (CEX) and Decentralized Exchanges (DEX).

Now, don’t worry if these terms sound confusing. I’m here to break it down for you in simple terms, so by the end of this, you’ll have a clear idea of how they work, and more importantly, which one might be better for you depending on what you want to do with your crypto.

1. Centralized Exchange (CEX)

A Centralized Exchange (CEX) is an online trading platform that allows people connected to the internet to buy, sell, and swap cryptoassets. It is owned and operated by a private company, which means it is subject to the laws and regulations of every jurisdiction it operates in. A CEX requires users to sign up and open an account to participate, and a majority of CEXs demand Know-your-Customer/Anti-Money Laundering (KYC/AML) ID verification to trade.

It is a platform like Binance, Coinbase, or Kraken, where you can buy and sell cryptocurrencies. You can think of a CEX like a bank for crypto. It’s where you go to store, trade, and sometimes even earn interest on your crypto.

These are all the top crypto exchanges in the world by volume. And all of these are centralized exchanges. It's called "centralized" because a single company or organization manages the exchange. This means that the exchange holds your funds and controls the order book, matching buyers and sellers.

Now, here’s the important thing: When you use a CEX, the platform holds your crypto for you. This means you don’t actually control it; the exchange does. When you deposit Bitcoin or Ethereum on a CEX, it goes into an account managed by the exchange. You’re trusting them to keep it safe.

2. Decentralized Exchange (DEX)

A DEX (Decentralized Exchange) is a platform where people can trade cryptocurrencies directly with one another, without the need for a central authority or intermediary. Unlike centralized exchanges (CEXs), a DEX operates on a blockchain and uses smart contracts to facilitate trades.

With a DEX, you keep control of your own funds. You connect your wallet (like MetaMask or Trust Wallet) to the exchange, and transactions are executed directly between users. Popular examples of DEXs include Uniswap, PancakeSwap.

A DEX, on the other hand, runs on smart contracts, which are pieces of code on a blockchain that automatically execute transactions. Although a project or entity may set up a DEX, it can run on its own as long as people keep providing liquidity.

Instead of using an order book like a CEX, most DEXs use an automated market maker (AMM) system to make trades happen. To use a DEX, you only need a crypto wallet and some crypto to cover transaction fees. There's no need to register or create an account.

II. How Does Each Work?

First, I need to admit that the crypto market can be intimidating, especially for beginners. But don't worry! I’ll break things down in a simpler, friendly way so it’s easy to understand for you.

1. How a Centralized Exchange (CEX) Works:

When you use a Centralized Exchange (CEX), the entire trading process is controlled by a single company or platform. Think of it like using a bank. Here’s how it breaks down:

1. Account Creation and Verification

   • The first thing you do when using a CEX is to create an account. Just like setting up a bank account, you’ll need to provide some personal details (email, phone number, etc.), and most exchanges will require a form of KYC (Know Your Customer). This means you'll have to verify your identity by uploading a photo of your ID or a utility bill to prove your address.

     

   • This process can take a few minutes to a couple of days, depending on the platform and your location.

2. Depositing Funds

   • After your account is set up, you’ll deposit funds into the exchange. You can do this by transferring your crypto (like Bitcoin or Ethereum) from your personal wallet, or you can deposit fiat money (like USD, EUR, or GBP) using bank transfers or credit/debit cards.

     

   • The exchange holds your funds while you're on the platform. So if you deposit Bitcoin, for example, it’s stored in the exchange's wallet, and you trade based on the platform’s internal system.

3. Placing Orders

   • Once your funds are on the exchange, you can start buying and selling cryptocurrencies. This happens in two ways:

     • Market Orders: You’re buying or selling at the current market price. If Bitcoin is trading at $25,000, you’re buying or selling at that price.

     • Limit Orders: You set your own price. For instance, you might want to buy Bitcoin only if the price drops to $24,500. If that price is hit, the exchange will automatically execute your order.

4. Matching Buyers and Sellers

   • CEXs have what’s called a “order book”, which is like a big list showing all the buy and sell orders on the platform. When you place an order, the exchange automatically matches you with another user who has an opposing order (buy vs. sell).

   • For example, if you’re buying Bitcoin and someone else is selling it at the same price, the exchange matches your order and completes the trade.

5. Withdrawal

   • When you're done trading, you can withdraw your crypto or fiat. If you withdraw crypto, you can send it to your personal wallet. If you want fiat, you can withdraw it back to your bank account or card.

     

   • The key thing to remember is that on a CEX, the exchange controls your funds while they’re on the platform. They hold your crypto in their custodial wallets, and they manage all the transactions.

2. How a Decentralized Exchange (DEX) Works:

A Decentralized Exchange (DEX) is the complete opposite of a CEX. Here, you don’t need to trust a central authority to trade. Everything happens peer-to-peer. Let’s break it down step by step:

1. Connecting Your Wallet

   • The first thing you do when using a DEX is to connect your crypto wallet (like MetaMask, Trust Wallet, or Coinbase Wallet) to the platform. This wallet is yours, and you control the private keys, meaning you hold the crypto.

   • You can easily connect your wallet by clicking a “Connect Wallet” button on the DEX platform, and then logging into your wallet (which could be on your browser or app).

2. Trading on the Platform

   • On a DEX, you’re the one in control. There’s no intermediary to manage your funds. When you want to trade, you place your order (just like on a CEX), but instead of the platform matching buyers and sellers, you are directly trading with another user through a mechanism called liquidity pools.

   • A liquidity pool is a collection of funds from other users who have deposited their tokens into the pool. These tokens are then used to facilitate trades. So, when you make a trade, you’re swapping your token with another user who has contributed their tokens to the pool.

3. How Liquidity Pools Work

   • Liquidity pools allow users to trade without needing an order book. Instead of waiting for someone to match your buy or sell order (like in a CEX), your trade happens instantly with the pool’s available liquidity.

   • For example, if you want to swap 1 Ethereum (ETH) for USDT, you do this directly from the pool of ETH and USDT that others have provided.

4. Swapping and Fees

   • When you trade on a DEX, you pay a small transaction fee (called a “gas fee”). The fee goes to the network, like the Ethereum network or Binance Smart Chain. The fee might be low or high, depending on network congestion.

   • The beauty of DEXs is that you own your assets. So while there are fees for transactions, there’s no central entity controlling your crypto.

5. Security and Ownership

   • You control your assets from start to finish. Your funds never leave your wallet unless you decide to trade.

   • DEXs also tend to be more secure against large-scale hacks. Since there is no central point of failure (like a big exchange), there’s a lower chance of all users losing their funds at once. However, there are still risks, such as smart contract bugs, so always be cautious.

6. Swapping and Providing Liquidity

   • If you want to provide liquidity to a pool (so others can trade), you can deposit your crypto into a liquidity pool and earn fees in return. But be aware of impermanent loss (when the value of your tokens in the pool changes relative to others).

III. Advantages and Disadvantages of CEX

1. Pros

a. User-friendly

A CEX like Binance makes crypto accessible for both beginners and experienced traders. For newcomers, it provides simple tools like Binance Convert, which allows you to easily exchange one crypto for another. If you're more experienced, you can use advanced features like the Spot Exchange with TradingView integration for detailed chart analysis and technical trading.

The process of signing up with a CEX is straightforward, much like opening a bank account. You don’t need to know complex technical details to get started, which makes it easier for new users. Plus, most CEXs accept payments through credit or debit cards, so you can purchase your first crypto with minimal effort.

b. Support and Protection

One of the most significant advantages of CEXs is the support they offer. Unlike DEXs, where you're mostly on your own, CEXs like Binance have customer support to help you out. For example, if you lose access to your account or forget your login details, you can reach out to customer support to recover your account.

Also, unlike DEXs where you’re dealing with blockchain tools like gas fees and wallets that can be tricky for beginners, CEXs simplify the process. There’s no need to worry about paying gas fees when transferring crypto within the platform, which removes some of the friction for new users.

c. More Integrated Services

CEXs offer a wide range of services that make them a one-stop-shop for crypto. On Binance, for example, you can not only trade crypto but also stake it, buy NFTs, participate in token launches, and even engage in peer-to-peer (P2P) trading - all from the same platform. This level of integration simplifies your experience, and transferring funds between these services is seamless.

Additionally, many CEXs have partnerships with merchants and services, so you can even use your crypto for things like travel or shopping. Binance, for example, lets you book hotels or flights with crypto through their partner, Travala. This convenience means you don’t have to leave the platform to access different crypto-related services.

2. Cons

a. Susceptibility to Attack

Because CEXs are large, centralized entities that manage huge amounts of user funds, they’re prime targets for hackers. Even though CEXs invest in high-level security, the risk of theft is always present. Over the years, there have been major hacks like the Mt. Gox hack, or FTX Collapse, or most recently, Bybit - another top CEX got hack $1.4B, and users lost millions of dollars. If a CEX gets compromised, any crypto stored there could be at risk. While most exchanges implement safety measures like insurance, the risk still remains.

b. Additional Transaction Fees

CEXs often charge fees for almost every service they offer, whether it's trading, depositing, or withdrawing crypto. These fees are sometimes hidden or “baked into” the service cost, making them less transparent. While CEXs can be more expensive due to higher operating costs, they still compete with DEXs, where you pay gas fees on every transaction. However, those gas fees can sometimes be very high, especially on networks like Ethereum, so you’ll need to weigh the overall cost of using a CEX versus a DEX.

c. No User Custody of Assets

When you trade on a CEX, you have to deposit your crypto into their wallet. This means you’re giving up control of your funds, relying on the exchange to keep them safe. If something goes wrong, like the exchange becomes insolvent or gets hacked, you may lose your crypto. This is similar to keeping your money in a bank - if the bank has issues or fails, you might not be able to access your funds. In contrast, with DEXs, you keep control of your crypto in your own wallet, and only you have the keys to it.

IV. Advantages and Disadvantages of DEX

1. Pros

a. Custody of Funds

On a DEX, you maintain full control of your funds at all times. Unlike a CEX, where you deposit your crypto into the exchange’s wallet, on a DEX, your funds stay in your own wallet. You’re the only one with access to your private keys or seed phrase, which means you’re in full control. Your crypto can be moved or stored exactly how you want. For those who advocate for decentralization, this is one of the key advantages because it eliminates the need to trust a third party with your assets.

b. Data Protection and Privacy

One of the biggest advantages of using a DEX is that it doesn’t require you to submit personal, identifying information. No need for KYC (Know Your Customer) checks, meaning you don’t have to worry about handing over sensitive details like your name, address, or government ID. This makes DEXs highly appealing to people who prioritize privacy and want to avoid having their data stored by centralized entities. Of course, when you use any exchange, you’re still bound by your local laws and regulations, but using a DEX keeps your personal data out of the equation.

c. Lower Barriers to Entry

Getting started with a DEX is simple. All you need is a wallet with some crypto and the ability to pay gas fees for transactions. There’s no need to go through a lengthy signup process or verification like you would on a CEX. This accessibility opens up the crypto market to people from around the world, especially in regions where traditional financial services are limited. For decentralization advocates, this is a major benefit, as it aligns with the philosophy of offering financial freedom to everyone, without intermediaries.

That said, it’s still important to consider local laws and the ongoing discussions about crypto regulation, as these can affect how freely people can use DEXs in certain areas.

2. Cons

a. Complex to Use and Enter

For someone new to crypto, using a DEX can feel overwhelming. There are various factors like gas fees, liquidity pools, wallet management, and slippage that can make navigating a DEX tricky.

• Gas fees: On some networks, these fees can be high, especially during times of heavy network congestion (like with Ethereum).

• Liquidity pools: To trade on a DEX, you need to understand liquidity pools—where users provide crypto to allow others to trade. If a pool is small or illiquid, it can lead to worse trade prices and more slippage.

• Slippage: This is when the price of a trade changes between the time you place the order and when it's executed, usually due to low liquidity.

These concepts take time to understand. If you’re not careful, you can make mistakes that could cost you money. DEXs require users to be more self-reliant and technically informed. For newcomers, this complexity can be a significant barrier.

b. Lack of Fiat On and Off Ramps

One of the major challenges with DEXs is the inability to directly buy or sell crypto with fiat currency (like USD, EUR, etc.).

• CEXs usually offer options to buy crypto directly with credit or debit cards, which is extremely convenient for beginners.

• While some DEXs are beginning to integrate third-party providers for fiat on-ramps, it’s still not as widespread, meaning you’d typically have to go through a CEX or another service to convert fiat to crypto before trading on a DEX.

This lack of fiat support makes DEXs less accessible for people who are looking to enter the crypto world easily with traditional money.

c. Liquidity Struggles

One of the biggest drawbacks of DEXs is their generally lower liquidity compared to CEXs. Liquidity refers to how easily an asset can be bought or sold without affecting its price.

• Smaller volumes: DEXs tend to have fewer trades taking place, especially in less popular tokens, which can lead to price volatility.

• Price impact: If you try to make a large trade on a DEX, the price may shift significantly (this is called slippage). On a large CEX like Binance, the liquidity is much higher, meaning large orders are less likely to impact the price as much.

This means that if you're trading in large volumes, a CEX may be a better choice because of its deeper liquidity and the ability to execute bigger trades without price swings.

V. Key Differences: CEX vs DEX

SHORT ANSWER! 

IT’S “CONTROL”. On a CEX, the exchange holds your assets/crypto, so you rely on their good faith. Whereas, on a DEX you own your assets/crypto.

=> CEXes have risks as users give up custody, making them vulnerable to hacks. Large exchanges faced attacks, and accounts could be frozen despite KYC compliance. 

On the other hand, DEX risks involve liquidity providers facing impermanent loss due to volatility and potential rug pulls since tokens are listed without auditing, leading to sudden losses if liquidity is withdrawn.

However, you still own your crypto as the private keys of the wallets are ONLY with you.

If you're new to trading or only familiar with traditional finance, the difference between a CEX and DEX might seem tricky. Let me clear it again for you. A CEX works like a stock exchange, where one company manages everything using an order book. Market makers and takers place their orders, and the exchange matches buyers with sellers, taking a small fee for the service.

Key Differences

• Central Governing Body for CEX can scam you at any point. Happened to top Centralized exchanges in the past.

• DEX have lower volume, CEX have a higher overall volume.

• Complete anonymity using DEX, whereas with CEX you have to share all the details about you including your personal details.

• Anyone can trade on DEX whereas there are roadblocks on CEX to trade.

• Anyone can create and list their token/crypto on DEX but CEX listing requires a certain threshold of trading volume, listing fee & pre requisites such as denouncing the ownership at times.

VI. Which One Should You Choose?

When deciding between CEX (Centralized Exchange) and DEX (Decentralized Exchange), it really comes down to what you’re looking for in terms of control, security, ease of use, and the type of trading you want to do. I’ve used both types extensively, and here’s a breakdown based on my experience:

1. When to Use CEX:

You’re a beginner or want simplicity

• If you're just getting started in crypto and don’t want to deal with setting up wallets or understanding complex technical details, CEX is the way to go. The user interface is usually very friendly, and you can make your first trade with just an email and password. Most exchanges (like Coinbase or Binance) also offer a mobile app, so it's super convenient to trade on the go.

• For example, I remember when I first started, I didn’t understand wallets, private keys, or how to even store crypto. I simply used Binance to buy my first Bitcoin with a bank transfer, straightforward. Coinbase is even easier for beginners, offering a simple way to buy and sell with no technical knowledge required.

You need liquidity and fast trades

• Centralized exchanges have higher liquidity, which means you can buy and sell larger amounts of crypto much faster. The more users a platform has, the easier it is for buyers and sellers to meet. This is especially important if you’re trading larger sums or if you’re trying to execute trades quickly without worrying about price slippage.

• On Binance, for example, you’ll find high liquidity for popular coins like Bitcoin or Ethereum. If you decide to trade a less-known coin, though, you might not see the same level of liquidity. But overall, for trading larger volumes, CEXs are much smoother. 90% of crypto trading volume happens on centralized exchanges.

You want customer support

• One of the biggest advantages of CEX is that they offer customer support. If something goes wrong, you can always reach out to the support team.

• I’ve had this happen a couple of times, and being able to chat directly with a customer service rep made the experience much easier. You can expect 24/7 support from platforms like Kraken or Binance.

You want more features

• Centralized exchanges often offer more advanced trading options, like margin trading, futures contracts, or staking. These options let you borrow money to trade more than you own or earn rewards for holding certain assets.

• If you’re looking to experiment with these, you’ll need to use a CEX. For example, Binance has a wide range of features, including staking rewards where you can earn interest on your crypto (sometimes 5% to 10% per year depending on the coin).

2. When to Use DEX:

You want full control of your crypto

• If you're like me and want to keep control of your funds at all times, DEX is the better option. With DEXs, you don’t need to trust anyone else with your crypto. You keep your private keys, meaning you are the only one who can access and manage your funds.

• I made the switch to Uniswap after learning about how centralized exchanges can be vulnerable. I loved the feeling of knowing my crypto was safe in my MetaMask wallet rather than being stored on an exchange I didn’t fully trust. Plus, if you keep your crypto in your wallet, you can take it with you anywhere, whether you're switching exchanges or moving assets across blockchains.

You’re after privacy

• DEXs let you trade anonymously. You don’t need to give personal information like your ID, address, or phone number - just connect your wallet and start trading. That’s one reason why I’ve enjoyed using DEXs for certain types of trades. The whole KYC (Know Your Customer) process on CEXs can feel invasive, especially if you just want to swap some tokens without anyone tracking your information.

• If privacy matters to you, DEXs will appeal more. I’ve also noticed that the more privacy-conscious people tend to prefer DEXs for these reasons. For example, with Uniswap, you can trade without even needing to provide an email address, just connect your MetaMask wallet.

You want to trade niche or new tokens

• DEXs are usually the first place where new and smaller tokens get listed. If you’re looking to buy tokens that aren’t available on big CEXs yet, DEXs are your go-to. In fact, most new tokens have their first listing on a DEX like PancakeSwap or Uniswap. You can swap tokens on Ethereum, Binance Smart Chain (BSC), and other networks before they’re available on major CEXs.

• I personally used PancakeSwap to get into some of the newer BSC-based tokens. The whole process can be a bit more complex, but once you understand it, you can access a lot of exciting projects before they’re available on larger exchanges.

You like decentralized control

• DEXs run on smart contracts that automatically execute trades between users. There’s no central party or middleman controlling the platform. Everything is fully decentralized. If you care about decentralization and the principles of crypto, DEXs are a better fit.

• From my experience, Uniswap and Sushiswap have shown me the real meaning of decentralization. There’s no CEO or company running the platform, and it’s all about the community. When I saw how much control the community had over the protocols, it made me realize why so many people believe in the decentralized future of crypto.

3. My Personal Recommendation:

• If you're just starting, go with a CEX to keep things simple. You’ll have 24/7 support, easy-to-use features, and access to lots of tokens with high liquidity.

• But if you want to keep control over your funds and value privacy, you should move towards DEXs.

Both exchanges have their pros and cons, but I recommend using both depending on your needs. You can use CEX for trading well-known tokens and use DEX for experimenting with new tokens or keeping control of your funds. Most serious crypto users end up using both at different times.

Summary & Next Steps

In this section, I’ll summarize everything you’ve learned about Centralized Exchanges (CEX) and Decentralized Exchanges (DEX), so you can easily understand which type of exchange is right for you.

So, to summarize:

• CEX is the best option if you’re a beginner or want an easy, fast experience. It’s perfect for buying popular cryptocurrencies quickly and easily.

• DEX is the way to go if you value privacy, control over your assets, and you’re comfortable navigating a more decentralized environment. It’s also great if you’re dealing with smaller, newer tokens that aren’t available on big exchanges.

Next Lesson: Different Types of Crypto Wallets