Centralized vs Decentralized Exchanges

May 26, 2024

Overview

CEXes (e.g., Binance) are centralized with high liquidity and fast, low-fee trades. DEXes (e.g., Uniswap) use P2P and smart contracts, offering more security and control but with slower, costlier transactions. Future tech aims to improve DEX speed and cost.

4 min. read

4 min. read

4 min. read

The cryptocurrency market offers a diverse option for buying, selling, and trading digital assets. Two types of trading platforms are commonly used today: Centralized Exchanges (CEXes) and Decentralized Exchanges (DEXes). Each approach caters to distinct investor needs.

Centralized Exchanges

Centralized exchanges like Binance, Coinbase, and Kraken are platforms where a central authority manages the exchange operations, including order matching, custody of funds, and customer service. 

CEXes operate similarly to traditional stock exchanges, where the order matching is done in a centralized manner fostering efficient trade execution and a user-friendly experience.  Furthermore, CEXes are typically better than DEXes in terms of liquidity, meaning a higher volume of buyers and sellers are constantly active. This translates to tighter spreads (the difference between the buy and sell price) and minimizes slippage, the potential for price deviations during trade execution.

Decentralized Exchanges

DEXs, in contrast, operate on a peer-to-peer (P2P) model. They utilize smart contracts on blockchains to facilitate direct trading between users, Decentralized exchanges like Uniswap, SushiSwap, and PancakeSwap operate without a central authority, relying on blockchain technology to facilitate trading without third parties. 

This innovative approach enhances security by mitigating the risk of exchange hacks and empowers users with complete control over their crypto assets. Additionally, DEXs often operate without Know Your Customer (KYC) procedures, catering to investors who prioritize anonymity.

DEXes vs CEXes

CEXes are faster and cheaper than DEXes due to their optimized infrastructure and centralized management, allowing quick transaction processing and lower fees. 

In contrast, DEXes are currently slower as they rely on blockchain networks where each transaction must be confirmed by multiple nodes from different users, leading to higher gas fees and longer processing times. However, future advancements such as Layer 2 scaling solutions, aim to increase transaction speeds and reduce costs for DEXes by handling transactions off-chain.

Enhanced user interfaces, better trading tools, and advanced liquidity solutions will further improve the user experience and liquidity on DEXes, making them competitive with the speed, cost, and functionality of CEXes.

Disclaimer: The information provided in this research paper is for educational and informational purposes only. It does not constitute financial advice, investment guidance, or any solicitation to buy or sell financial instruments. The views expressed herein are those of the authors and do not necessarily reflect the opinions of Kollectiv.

2024