CEXes and DEXes are the two main players in the crypto space. In this article, we’ll break down the main differences and risks of each.
Definition
A CEX, or centralized exchange platform, is a platform on which people can buy, sell and exchange cryptocurrencies. That the platform is centralized means that it acts as an intermediary between buyers and sellers of cryptocurrencies, like a broker.
A DEX is a decentralized exchange platform. As we can see it is the same as a CEX but without acting as an intermediary between users.
Next, let’s delve into the differences between them.
Control of the funds
As we have already said, the main difference between a CEX and a DEX is that the former are centralized platforms, which means that the platform acts as an intermediary.
When a user wants to buy cryptocurrencies on a CEX, he must deposit fiat money (dollars, euros, pounds…) in his account on the platform and place a purchase order. When the platform connects you with a seller it will send a receipt to each of you for the transaction and both of you will have the corresponding amount of each asset in your account.
For its part, the platform will do what it considers with the users’ money.
As we can see, the platform acts as an intermediary because it controls the users’ funds from the moment they deposit them in the platform, it is like a broker.
On the other hand, DEX are decentralized platforms, they do not control the investors’ funds at any time. You do not have to create an account in a DEX to trade with it, you only need to have a digital wallet compatible with that DEX.
DEXs do not use order books to connect buyers and sellers, instead, they use automated market makers. This is nothing more than an automated trading system.
Therefore, all trades in a DEX are carried out automatically by executing code, so there is no one moving people’s money as in a CEX, there is no human action.
What a DEX provides is the infrastructure formed by code for users to use. Investors put money into the infrastructure and it performs a certain function.
When users use a CEX, they give it control of their money, whereas when they use a DEX, they control their assets.
Privacy
The other major difference between a CEX and a DEX is privacy.
To operate in a CEX we have to create an account in the platform and for that we have to give certain personal data.
These platforms are companies that have to maintain a KYC (know your client) policy, therefore, their clients have to go through an identity verification process. This involves uploading a photo of your ID card, your address, email…
However, a DEX will never ask for any personal data. There will be no trace that identifies us as people, it will simply record the transaction x that the digital wallet y made.
Risks
Regardless of the type of platform you use to invest, there are certain risks you should be aware of.
In the case of CEXs, the main risk is associated with the fact that they control your funds. This means that there is a risk that the platform does not manage the users’ money well and when you want to withdraw it, it does not allow you to do so. In the worst case scenario it could happen as in the FTX platform, in this case the investors lost all their money.
On the other hand, remember that DEXs have automated all their operations through code. Thus, the main risk they have is that there is a failure in the code and therefore we lose our investment or part of it. This can happen because the code does not execute the different actions correctly or because a hacker detects the code failure and takes advantage of it to steal investors’ funds.
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