Two types of exchanges exist in the crypto world that allow you to trade digital assets in the market: Centralized exchanges (CEXs) and Decentralised exchanges (DEXs).

In this blog, we will cover:

• Centralized Exchange (CEX) & how does it work?
• Decentralized Exchange & how does it work?
• CEX vs DEX
• Advantages and Disadvantages
• Conclusion

What is a Centralized Exchange (CEX) & How does it work?

Crypto exchanges are online trading platforms that allow you to trade crypto assets via an intermediary. The exchanges act as a middleman between a buyer and seller to facilitate transactions. An account on a crypto exchange is more like your online brokerage account to trade crypto. There are many crypto exchanges across the world such as Binance, Coinbase, Kraken, CoinDCX, etc and one can easily create an online account on their websites or mobile apps and commence trading.

What is a Decentralized Exchange & How does it work?

Decentralized exchange (DEX) is the next stage in the evolution of trading digital assets that allow users to trade and execute transactions without an intermediary. A DEX is a marketplace that facilitates peer-to-peer exchange of crypto assets where the users can directly trade with each other without transferring the management of their funds to an intermediary.

DEXs use smart contracts which are self-executing computer codes that automatically facilitate transactions once certain conditions are met. Smart contracts establish the prices of crypto assets by leveraging algorithms and utilize liquidity pools where investors can lock up their funds to earn interest in return on their idle crypto holdings. Some of the most popular DEXs are Uniswap and SushiSwap.

Read more: How to keep your crypto safe with Self-Custody?

Centralized vs Decentralized Exchanges

Some of the features that we will cover to differentiate between centralized and decentralized exchanges are as follows:

• Ease of Use: The ease with which users are able to navigate and invest in digital assets
• Product offerings: Differences between the products offered on both types of exchanges
• Ownership of Assets: The difference between who maintains complete ownership of assets on different exchanges
• Security: How secure are the user funds on both types of exchanges

Advantages and Disadvantages: DEX vs CEX

Ease of Use

The interface of CEXs is simple and easy to use and thus, the majority of the crypto volume is currently on centralized exchanges. Only a simple email and password is needed to start trading on CEXs and hence, users find it easier to trade on CEXs as compared to DEXs. Some of the CEXs are regulated entities that custody the funds of the users, and also provide insurance on deposited assets, making it easier for users to trust a CEX. However, emerging DeFi platforms such as Okto are designed for users to explore and navigate Web3 opportunities as seamlessly and efficiently as Web2.

Product offerings

With continued development in the blockchain space, many innovative products have emerged through the advent of DEXs. DeFi products such as Staking, Lending, Swap, Liquidity farming, etc., provide novice ways for investors to explore various opportunities and earn high yields. Moreover, DeFi provides an ecosystem for developers to innovate as it allows easy integration of smart contracts and decentralized applications (DApps) that are essential for the development of new financial products. For example, with Okto, one can access thousands of assets via cross-chain and multi-chain interactions between protocols, providing high-yield earning opportunities to investors.

Read More: Beginners Guide to Decentralized Finance

Ownership of Assets

Since DEXs do not involve any intermediary, traders transact directly with each other without transferring the control of their funds to an intermediary, maintaining full custody of their funds. Moreover, since trades are executed automatically using smart contracts, user data and privacy is maintained without any threat to a data breach or the privacy of the user. Okto removes the requirements for any authority to oversee and authorize transactions and allows for a direct exchange of crypto and digital assets. Okto DeFi Wallet allows users to keep control of their wallet’s private keys which are essential to access their crypto.

Security

Security is considered more robust for DEXs in comparison to CEXs as they are decentralized. Data on CEXs is stored online and hackers can target such platforms to gain access to the central database, compromising users’ private keys and withdrawing their funds. On the contrary, as most of the DEXs do not hold any private keys that are required to gain access to the user’s account, it is difficult for hackers to gain control of a user’s crypto wallet.

Also Read: Traditional finance v/s decentralised finance

Final thoughts

Is a DEX safer than CEX? The choice of DEX or CEX depends on several factors:

• The type of assets that you are looking to trade
• The way you are looking to control ownership of your assets
• Whether decentralization matters to you or not
• The trading options you are looking to access
• Safety of a particular DEX vs CEX that you looking to explore
• The ease of use offered on both types of exchanges
• The transaction fees on DEX vs CEX

In short, with the advancement of blockchain technology, decentralized exchanges have evolved to offer a more secure and transparent way of trading digital assets as compared to centralized exchanges. Decentralized finance solutions such as Okto offer self-custody of users’ funds where the users maintain ownership of their assets with complete control of their private keys while having access to more innovative financial products and digital assets in DeFi.

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