A decentralized exchange or DEX is the increasingly popular way to get your hands on new cryptocurrencies. With decentralized exchanges, you are in charge of your assets. On the other hand, CEX (Centralized Exchange) are operated by companies that own it in a centralized manner and custody your assets. How do they work, and which one should you pick? Let?s dive into it!
- What is a decentralized exchange (DEX)?
- How does a DEX work?
- What are the pros & cons of using a DEX?
- Which DEX should you use?
- What is a centralized exchange (CEX)?
- What are the pros & cons of using a CEX?
- DEX Vs DEX: Which should you pick?
Crypto exchanges offer platforms where people can transact freely. However, they work differently depending on whether they are centralized or decentralized exchanges.
What is a decentralized exchange (DEX)?
A decentralized exchange or DEX is a crypto trading platform that does not rely on intermediaries to help execute transactions between two different individuals.
No desks or office employees are required for its functioning. User interactions on a DEX happen through smart contracts, which are pieces of software on the blockchain.
- Learn more about smart contracts with our beginner’s guide
The most popular DEXs are built on the Ethereum blockchain. Check them out on DappRadar!
How does a DEX work?
A decentralized exchange operates automated order books or automated market makers (AMMs) by leveraging smart contracts. This makes them truly peer-to-peer, allowing users to swap tokens efficiently and transparently for traders.
Decentralized exchanges are anonymous and don?t require KYC (know your customer) from users to participate in any transaction.
There are three different parts to a DEX, here is an overview of how it works :
Automated money makers (AMMs)
AMMs don’t use order books. They leverage smart contracts to create liquidity pools that automatically execute transactions.
On-chain order books
With this approach, every node on the blockchain network keeps a record of the order forever, thus incurring high fees for users.
This means that users must wait for miners to add their message to the blockchain. Such a process can be complex and frustrating to execute.
Off-chain order books
They are more centralized than their on-chain counterparts. Instead of functioning as a single DEX, it creates a framework where parties called “relayers” can handle off-chain order books.
What are the pros and cons of using a decentralized exchange?
Pros
Full control of your assets
Decentralized exchanges give users full control over their private keys, and their funds. No government or other entity can claim access to the user’s funds.
Recent events in the crypto industry remind us of the importance of being the self custodians of our assets.
Better security
The security of decentralized exchanges is miles ahead of their centralized counterpart. Hackers steal frequently from centralized exchanges.
Not user-friendly
The user interface of most DEXs is complicated, making it very difficult for the average user to get on board.
Impermanent loss
Liquidity providers might withdraw more of the token that lost value and less of the one that gained value, compared with their starting assets.
Which DEX should you choose?
First of all, this requires a bit of research and matching your needs with what the specific platform has to offer.
Here is a quick overview of some of the best exchanges out there:
Uniswap
With Uniswap, you can earn interest on your crypto holdings through Uniswap’s liquidity pools. It is one of the most popular decentralized exchanges (DEX) in the market.
UNI is the governance token for the Uniswap platform. A governance token gives users the right to participate and shape the platform?s future.
Sushiswap
Sushiswap allows swapping and passive earning. You can add liquidity to its pools or stake on the xSUSHIBAR protocol for passive income earned.
The exchange has a utility token known as SUSHI that users can stake on the exchange and even trade in some of its competitors. RADAR token holders can make their tokens work for them using SushiSwap, and retain DappRadar PRO features?
PancakeSwap
PancakeSwap is a decentralized finance dapp running on BNB Chain. It offers DeFi users a wide variety of functionality and crypto tools like swapping, liquidity farming, and staking. The PancakeSwap ecosystem is powered by the platform’s native token, CAKE.
Curve is said to be one of the most user-friendly decentralized exchange platforms and is similar to Uniswap. The biggest difference is that Curve focuses on stablecoins, among which we can find DAI, USDC, USDT, BUSD, and more.
What is a centralized exchange (CEX)?
Centralized exchanges are the usual way in which Web3 newbies access the world of crypto. These exchanges are owned centrally by companies and they act as custodians of your money, in contrast with decentralized exchanges, where you are always in control of your assets.
What are the pros & cons of using a CEX?
Pros
Ideal for newbies
Those looking for an easy way to get into crypto will see many pros with centralized exchanges. They free users from the responsibility of handling their private keys.
More exposed to hacker attacks
As with centralized exchanges, the likelihood of hacker attacks increases with central points of failure.
Risk of losing your assets
The biggest con is running the risk of the central company running the exchange not being financially stable and ultimately losing your assets.
DEX Vs CEX: Which should you pick?
If you put more value into security, total control of your assets, and lower fees then the ideal choice for you is a DEX.
On the contrary, if you feel more comfortable giving up control of your assets in turn for a more user-friendly experience and the the ease of not handling your private keys then CEX is the right pick for you.
