CEX vs DEX 🤜🤛: Learn why you need both in your DeFi adventures
We take into account some essential characteristics of Centralized Exchanges (such as Binance, OKX, Bitfinex, Coinbase, among others) and Decentralized exchanges (Uniswap, Kyber, Pancakeswap, DexKit trading solutions, among others) in order to make a comparison between them. Let’s evaluate some advantages and disadvantages of each and why users need both if they are willing to be DeFi wizards 🧙♂️
Before start, CEX stands for Centralized Exchange, while DEX stands for Decentralized Exchange. The main difference between the two is how they operate, and below we will learn how they work:
A CEX is run by a central authority, such as a company. This means that the company controls the trading platform, the transactions, and the users’ private information. This centralization means that the company has the power to manipulate the trading platform and can potentially freeze or confiscate user funds.
On the other hand, a DEX is run on a decentralized network, such as a blockchain. This means that there is no central authority controlling the trading platform. Instead, it is run by a network of users who validate transactions. This decentralization means that there is no single point of failure* and users have full control over their own funds. Additionally, because DEXs are built on blockchain technology, they can offer increased security and privacy compared to CEXs.
In simple terms, CEX is a traditional way of trading where a centralized body controls the trading platform, while DEX is a new way of trading where no central body is controlling the trading platform, the transactions and the user’s private information.
But wait, DEX trading is not almighty safe* 👀👇
In the case of DEXs, one risk is the potential for funds to be stolen or frozen in a liquidity pool. Liquidity pools are pools of assets that users can add to and withdraw from to provide liquidity to the exchange. However, if the smart contract that manages the liquidity pool is compromised, it may be possible for funds to be stolen or frozen. Additionally, if a user is utilizing a token bridge to connect to a DEX, they can be subject to losses if the bridge is hacked.
Another risk is the potential for funds to be frozen or confiscated on DEXs that use stablecoins such as Tether (USDT) or USDC. These stablecoins are pegged to the value of a fiat currency and may be subject to government regulations and legal action. If a user’s funds are held in these stablecoins, they may be subject to freezing or confiscation by the government. If you are looking for a safer stablecoin to hold your savings, DAI from MakerDao may be useful.
It is important to keep in mind that the decentralized nature of DEXs does not make them immune to these risks. However, DEXs can offer increased security and privacy compared to CEXs by allowing users to have full control over their own funds and not relying on a central authority to secure them. Additionally, the use of blockchain technology can make it more difficult for hackers to compromise the exchange.
Why do you need both CEX and DEX? 🤔
Perhaps the best way to have your juicy savings is to have them in a cold hardware wallet in a stablecoin like DAI, but when you have to sell some of your earnings you will need a fairly reliable centralized exchange to trade fiat.
Let’s take into account that DeFi platforms tend to be mostly recipients of fiat money (through integrations such as Transak, Ramp, among others) but, for the end user, it is not so easy to withdraw to their bank account without the use of a CEX with proven liquidity.
Here is a bit of the importance of both for those who pretend to be a DeFi master 😎