CEX vs. DEX: Which Should You Choose in 2024?

Every crypto enthusiast’s journey starts with buying a cryptocurrency from an exchange. Primarily, buying and selling cryptocurrencies occurs on centralized exchanges (CEX) and decentralized exchanges (DEX).

The crypto community is constantly debating on which method is the best way to trade crypto. The answer to the DEX vs. CEX debate is subjective. Both methods have their advantages and disadvantages.

In this article, we lay out the differences between DEX and CEX to help you find out which method suits you best.

Table of Contents Table of Contents

1. Key Takeaways
2. Centralized vs. Decentralized Crypto Exchanges: How Do They Work?
3. CEX vs. DEX: Side-By-Side Comparison
4. Pros and Cons of Decentralized Exchanges
5. Pros and Cons of Centralized Exchanges
6. CEX vs. DEX: Which Is Best for You?
7. The Bottom Line
8. FAQs
9. References

Show Full Guide

Table of Contents

1. Key Takeaways
2. Centralized vs. Decentralized Crypto Exchanges: How Do They Work?
3. CEX vs. DEX: Side-By-Side Comparison
Show Full Guide
4. Pros and Cons of Decentralized Exchanges
5. Pros and Cons of Centralized Exchanges
6. CEX vs. DEX: Which Is Best for You?
7. The Bottom Line
8. FAQs
9. References

Centralized vs. Decentralized Crypto Exchanges: How Do They Work?

Cryptocurrency exchanges are platforms where investors and traders can buy, sell, and trade tokens and crypto futures. There are two forms of crypto exchanges – CEXs and DEXs.

CEX is a crypto exchange that is operated and controlled by a centralized entity. CEXs have a similar setup to traditional stock market exchanges where transactions are settled off-chain and liquidity is provided by parties known as market makers.

Most importantly, CEXs keep custody of their customers’ assets unless they withdraw their crypto tokens away from the exchange.

DEX is a crypto exchange that does not need centralized intermediaries to facilitate crypto trading. DEXs use smart contracts and liquidity pools to process token swaps. All transactions occur on-chain.

Unlike CEXs, trading cryptocurrencies on DEXs allows users to keep full custody of their crypto tokens at all times.

As of May 2024, the DEX vs. CEX volume ratio, which compares the monthly spot trade volumes at decentralized exchanges and centralized exchanges, stood at 8.2%.

According to CoinMarketCap, as of May 9, 2024, the Binance centralized exchange is the leading spot CEX with a daily trading volume of $17.5 billion, while SynFutures v3 is the top decentralized exchange with a 24-hour volume of $971.3 million.

CEX vs. DEX: Side-By-Side Comparison

Pros and Cons of Decentralized Exchanges

Advantages of DEXs

• Decentralized – DEXs provide users with decentralized and permissionless trading environments, free of the control and influence of centralized operators.
• Permissionless – Anyone with a crypto wallet and internet access can trade cryptocurrencies on a DEX.
• Open-Source – DEXs are built on open-source code, which allows anyone to study how they function.
• Liquidity Pools – The decentralized nature of DEXs requires it to maintain liquidity pools of tokens, which are used to facilitate token swaps. Anyone who contributes to liquidity pools by depositing their tokens earns a part of the trading fees on a pro rata basis.
• Anonymity – DEXs do not require users to set up an account and completely know your customer (KYC) processes. Users only need a crypto wallet to use a DEX.
• Variety of Tokens – DEXs are permissionless in nature, which means that any token that exists on a blockchain will be available for trading (provided there is enough liquidity to fulfill trades). Users will find popular and exotic tokens listed on DEXs.
• Self-Custody – Whenever users trade on DEXs their crypto tokens are always stored in their own self-custodial wallet. DEXs do not custody tokens for traders.
• Reduced Counterparty Risk – Since DEX users’ crypto tokens are stored in their personal wallets, they will not lose their tokens in the event that the DEX fails.

Disadvantages of DEXs

• Complexity – Using DEXs requires some technical knowledge about cryptocurrencies. Users must know how to use self-custodial wallets, how to traverse various blockchain networks, how to pay gas fees, and more.
• Gas Fees – Since DEXs function on-chain, users need to pay gas fees each time they execute a transaction on a DEX.
• Smart Contract Vulnerabilities – Smart contracts that power DEXs can be exploited and hacked, which can result in the loss of user funds.
• Low Liquidity – Certain tokens listed on DEXs may have low liquidity, which can result in wider spreads and higher slippages during token swaps.
• Risky Tokens – As DEXs are permissionless crypto exchanges, all cryptos that exist on the underlying blockchain network can be listed on it. Traders must conduct their own due diligence before trading tokens on DEXs to avoid getting scammed.
• No Fiat On-Ramp & Off-Ramp – One of the biggest drawbacks of DEXs is that they do not offer fiat on-ramps and off-ramps. Usually, DEXs only offer crypto-to-crypto exchanges.

Pros and Cons of Centralized Exchanges

Advantages of CEXs

• Convenience – Convenience is one of the biggest advantages of CEX over DEX. CEX platforms tend to prioritize user-friendliness over providing a web3 experience. These platforms are designed to appeal to crypto traders and investors of all experience levels.
• High Liquidity – CEXs are known for providing high liquidity, which enables tighter spreads and lower slippages in trading.
• Fiat On-Ramp & Off-Ramp – As CEXs cater to crypto traders and investors of all experience levels, they prioritize fiat-to-crypto (and vice versa) over token swaps. Even regular DEX users use CEXs to convert their crypto into fiat.
• Compliance – CEXs prioritize regulatory compliance to stay on the good books of government authorities. Therefore, CEXs are obliged to implement KYC and anti-money laundering procedures. This compliance-first way of doing business not only protects investors but also ensures that the exchange is available to users in the future.
• Variety of Features – CEX platforms are known to be loaded with features such as staking, copy trading, limit orders, NFT marketplace, futures exchange, systematic investment plans, learning modules, news, and more.
• Tax Record – CEX makes it easy for crypto tax payers to record transactions and generate income tax reports.
• Fast Transactions – The centralization of power and off-chain settlement allows CEXs to offer fast and cheap transactions to users.

Disadvantages of CEXs

• Censorship – CEXs are not permissionless environments. These platforms are operated and maintained by a centralized entity, giving them the power to censor customers and listed tokens. CEXs can also restrict withdrawals and buying/selling of tokens.

• Exchange Failure Risk – Since CEX holds custody of their customer’s assets, the event of failure/hack/bankruptcy of the exchange may result in users losing their cryptocurrencies. We saw this play out in 2022 when FTX exchange customers were unable to access their cryptos following its collapse.

• Privacy Concern – Customers can only use the CEX platform after setting up an account with them and completing KYC obligations. These processes require users to submit their personal information.

• Platform Fees – CEXs charge users various fees when they trade, buy and sell cryptocurrencies.

• Less Listed Tokens – Compared to DEXs, CEXs have fewer cryptocurrencies listed on their platform. The listing process of new tokens can be slower as they are first vetted by the CEX.

• Hacks – Users are at the risk of losing their investment if the CEX they use gets hacked. Therefore, it is important to study the various security and insurance measures taken at a centralized exchange when choosing a CEX.

CEX vs. DEX: Which Is Best for You?

Choosing a CEX vs. DEX crypto exchange ultimately depends on your needs as a crypto investor/trader. Let’s go through the key areas that you should consider.

1. Experience Level

If you are a newcomer to the crypto world, it is best to start your crypto investment journey using a centralized exchange such as Binance, Coinbase, or Robinhood. CEXs have user-friendly interfaces which make it easy for first-time investors to learn more about the crypto sector. Once you master how to use a CEX, you can try using a DEX and experiencing the web3 world.

2. Risk

DEXs are considered a less risky option than CEXs because your cryptos are always under your control when you use a DEX. Your cryptos will be held in your self-custodial wallet when you use a DEX. On the contrary, CEX users give the exchange custody over their crypto asset, which can lead to a loss of investment in the event the CEX gets hacked or goes bankrupt.

3. Liquidity

When it comes to liquidity, CEX trading outperforms DEX trading. CEXs typically use market makers who provide liquidity, which results in fast transactions, tighter spreads, and lower slippages. On the other hand, DEXs depend on the community and projects to deposit tokens to liquidity pools. Trading in exotic tokens poses the risk of high slippages and wider spreads, resulting in investor losses.

4. Privacy

If privacy is a big concern for you, then using a DEX will suit you well. Users do not need to create an account or submit private information to use DEXs. Users only need crypto wallets to begin trading on a DEX. Meanwhile, CEXs require users to create accounts and complete KYC processes to begin trading.

5. Regulatory Compliance

If you want to prioritize regulatory compliance, then using a CEX will suit you best. Most CEXs operate in a compliance-first manner to reduce the risk of regulatory action. Furthermore, CEXs also provide users with tax reports, which make it easy for crypto investors to report their crypto transactions and pay taxes incurred.

6. Exposure to Cryptocurrencies

If you want to trade and invest in less-known cryptocurrencies, then DEX trading will suit you. The permissionless nature of decentralized exchanges allows all types of tokens to list on DEXs (provided they have adequate liquidity). On the other hand, CEXs tend to implement strict and slow vetting processes, which results in a lesser number of tokens listed on CEXs compared to DEXs.

The Bottom Line

The choice between trading crypto on DEXs vs. CEXs ultimately boils down to your priorities.

Users need not think too hard when choosing between CEXs and DEXs. You can use CEXs and DEXs simultaneously to make the best of both worlds.

More importantly, you should conduct thorough due diligence on which particular CEX and DEX to use in your crypto investment journey.

FAQs