What is DEX, and how to perfectly differentiate it from CEX?
Decentralized finance aims to eliminate all the possible middlemen and to promote peer-to-peer yet secure transactions. However, every transaction in cryptocurrency is virtual and digital. Therefore, one must use a protocol or platform to execute the task, and that is with the help of DEX. So what is DEX?
In this article, PrivacySwap will unearth what DEX is and how it is different from CEX.
DEX or decentralized exchange are platforms that assist investors in their peer-to-peer transactions. Unlike CEX or centralized exchanges, there is no relationship between DEX and any bank or government entity. Instead, DEX platforms utilized smart contracts for a safe transaction. In addition, users can still have complete control of their assets while transacting.
Decentralized exchange platforms are a powerful technology that developers built and people widely use today.
DEX and CEX: How are they different?
Most of us thought that decentralized finance was created to answer the problems known to plague centralized exchanges. However, as we used both exchanges, we discovered that the pros of the other exchange are just features lacking in the other. Confusing? Let‘s break it down.
CEX Pros and Cons
Typically in a centralized exchange, you can directly buy a cryptocurrency using fiat currency. When it comes to trading, a centralized exchange is much easier to use. This type of exchange naturally creates their platform with much more basic steps and easy-to-follow tutorials. Trading volume is also a beneficial aspect of a centralized exchange.
Due to the popularity and volume of daily users, CEX tends to have high liquidity. These dynamic platforms essentially ensure that new investors can readily transfer their assets at any time.CEXs allow skilled traders to move relatively substantial amounts of money in and out of the market in a matter of minutes. Centralized exchanges also offer various features that entice customers. Binance, for example, delivers features such as margin trading, crypto derivatives trading, exchange staking, margin lending, and more.
Though CEX is incredibly beneficial, especially to new users, it also comes with drawdowns that could negatively affect some users.
CEX has some strict KYC (know your customer) verification. KYC primarily consists of the user’s valid ID card and a face photo. This is to maintain privacy while trading. Hacks and malicious activities are rampant on the platform. In addition, one of the major drawbacks is that CEX platforms are custodial of the users’ tokens. This means that users don’t have full authority over their assets.
Moreover, there are still a good amount of traders who use CEX platforms and are using those disadvantages as a red flag to avoid possible loss.
Also Read: Governance token and how you can take advantage of it
DEX Pros and Cons
In DEX, trading is limited at the moment. Despite the lack of KYC, DEX is known for its secure and private transactions. Anonymity adds up to the security of the platform. Exchanges of this type are non-custodial, meaning you have complete control over your coins and tokens even while transacting. Identity verification is no longer needed when trading within DEX platforms. Thus, no possible data leak. DeFi and NFTs are the two blockchain frontiers, and DEXs are powerful media. DEXs provide consumers access to the world of smart contracts and DApps that offer financial services like loan and savings products and NFT initiatives.
Because of the increased user-friendliness and growing understanding among crypto users about the significance of maintaining ownership over one’s private keys, DEX has taken a significant share of the crypto trading market.
Meanwhile, Decentralized exchanges are not as fast and efficient as CEXs due to the scalability issues faced by most blockchains. Centralized exchanges are not faced with this problem because they use both on-chain and off-chain mechanisms to ensure they run smoothly.
DEX also has a risk of complete loss as platforms commonly have a recovery phrase (or seed phrase), which also acts as a security question. If you lose your recovery phrase, you will lose your wallet alongside all your assets on the wallet.
Moreover, both platforms are suitable for buying and selling various cryptos. CEX attracts more newcomers as its UI is very elementary. On the other hand, DEX has a much more complex UI and is suitable for an experienced investor.
Related Article: Risk of Yield Farming
In a nutshell
DEX has remarkably achieved so much considering its age. Though blockchain developers created DEX to address concerns in CEX somehow, some problems exist on DEX that CEX unconsciously solved.
At the moment, the centralized exchange still reigns most of the crypto transactions. However, with the great features DEXs offer, such as the trustless method of channeling merchants from each other, people might consider using this as an alternative to CEX. DEX platforms are mostly on their promotional stage, so they still need further refinement and enhancement for future ratification.
After the “great migration” project of PrivacySwap, the platform aims to build a DEX that could revolutionize the whole DeFi ecosystem. With that, we can help investors earn from the platform and improve users’ experience. We always advise you to remain careful of every step you are doing with whichever exchange you are engaging in, as everyone could encounter underlying risks.
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