Starting out in the cryptocurrency space can be daunting. So many terms, acronyms, and layers to this space. Books have been written, blogs have been made, and YouTube channels have explained many things about cryptocurrency. Indicating that we are still early in this space.
One of the most important concepts within the crypto space is to understand centralized versus decentralized and which one is best for you. It reminds me of The Matrix, when Neo is given that important choice to choose between the red or blue pill. I cannot remember which pill is what but in any case, one can open your mind to endless possibilities and the other you are just stuck in the mundane. Luckily, I have you covered and will do my best to explain these exchanges, advantages, and disadvantage. Strap in.
Centralized Exchanges or CEX
Centralized Exchanges or CEX for short are platforms that are run by corporations to allow you to buy, sale or trade your cryptocurrency. These exchanges are like your brick-and-mortar stock exchange broker accounts such as Charles Swab, Ameritrade, Robinhood, etc. The CEX utilizes an orderbook to track transactions for their customers. A “middle-man” is used to execute your orders. According to Stelareum, the top three centralized exchanges are Binance, BingX and Bitmex (1). Coinbase-Exchange, Kucoin and FTX make the top ten and depending on where you are located you may choose one over the other.
Advantages of Centralized Exchanges/Centralized Applications
The advantages of CEX are easy utilization of the application, you would not need programing skills. Literally you go in and buy the tokens you would like and now you have “possession” of the tokens within the exchange. If the exchange goes up, you make money and if it goes down you lose money. Another advantage is staking on these platforms do not require a lot of work. There is no need to yield farm to earn APY or leverage, need a refresher on DeFi, visit the link. In addition, you would have customer service, if something went wrong with the company or your funds, you would essentially be able to contact a person to speak about your issue and most likely get it solved. Certain things cannot be solved because of your private keys or seeds (those words you need keep secrete).
Disadvantages of Centralized Exchanges/Centralized Applications
The things that make CEX great are also the things in which cryptocurrency was originally built to change. Centralization utilizes an intermediary source or middleman to get things done like banking institutions. In the crypto space, depending on who you ask, centralization is not a great thing because it allows institutions to control the market over the little man or the people. If something happens that will benefit the corporations over their customers or the bottom line, then most of the time the customers are left holding the short end of the stick.
CEX do not allow you to utilize all the caveats of cryptocurrency and one cannot take advantage of earning higher APY through lending, leveraging, and staking multiple digital assets. Not all tokens are available on CEX. Furthermore, you would not be able to be like your own bank.
Decentralized Exchanges or DEX
Decentralized exchanges or DEX are really the core of cryptocurrency technology. DEX allow you to literally do everything a bank can. The purpose of DEX being created was to cut out the middlemen, meaning you would not have to rely on centralized institutions to make money, lend money or buy goods/assets. Utilizing blockchain technology and peer to peer trading (P2P), your assets are executed on smart contracts.
Since the invention of Bitcoin and then Ethereum there are so many different DEX on the market. According to Stelareum, the top three are: Pancake swap, Balancer, and Curve-Finance (2). Depending on how you would like to utilize decentralize applications, this can change. For example, using DeFi applications.
Advantages of Decentralized Exchanges/Decentralized Applications
The obvious advantage of DEX is privacy. Since you are Peer to Peer (P2P) trading you would need to utilize a hard or soft wallet and would own the private keys for said wallet. Thus, enabling you to protect your digital assets, NFTs, etc. Ability to have more ownership since you would need to utilize your wallets for transactions. More available digital assets, unlike CEX.
In addition, since information is always on the blockchain, your transactions are transparent, but no personal identification is shown other then your public address from your wallets. You can check to make sure that digital assets were sent in your wallet by utilizing the scanners or blockchain explorers. For example, Ethereum blockchains will utilize etherscan.io, put your public address from your wallet in and all your digital assets, etc. will be displayed for you to check any and every transaction with that wallet. More advantageous APY and potential return on investment (ROI) when utilizing DeFi applications.
Disadvantages of Decentralized Exchanges/Decentralized Applications
The biggest disadvantage is DEX is the fact that customer service does not really exists. If something goes wrong with your digital assets, such as hacking, malware or worse your private key or seed stolen you are OUT OF LUCK. No one can access your wallet but you. Therefore no one will be able to help you personally but can guide you with tips. But if your wallet is compromised, that’s it.
There is a learning curve to utilizing DEX and DeFi applications, so it is imperative that you educate yourself through blogs, YouTube “University” or whitepaper sources. Understand what the risks and rewards are and how to navigate to accomplish your digital asset goals.
If someone has programming skills, open source (i.e., coding/computer skills) for utilizing smart contracts, etc. comes easy. Unfortunately, some people may not have this knowledge and can be discouraged from using decentralized exchange or applications. Transactions may not be as fast or convenient as centralized systems, but that’s changing.
Conclusion
CEX and DEX both have their advantages and disadvantages. Choosing one depends on your comfort level, your goals and time. Being educated on both applications/exchanges can help maximize your potential for creating a strong digital asset portfolio. There are some who would prefer only DEX due to the DeFi, smart contract ability, blockchain technology, true ownership of tokens and privacy. Whereas, other would prefer CEX due to ease of application, trusted sources (depends), reliability and governmental relations (which could persuade the markets). Also, some may be between both, like me.
DEX and decentralized applications are still in the beginning stages. Although there are many reasons to celebrate the technological feats decentralization has provided, there are still major things to take into consideration. Keeping it simple all blockchain services and applications want to be immutable (meaning once something is done on the blockchain it’s there forever), secure, have faster settlements of transactions, and scalability (controlling the increasing load of transactions and connections). Some hit the mark, and some are developing better features to do so.
With that being say, I’m bullish on the fact DEX and decentralized applications can grow and meet all the things we like about centralized exchanges and centralized applications but also remove the things we dislike about these entities. Like, Neo you may need to choose which pill is best for you to swallow. All the Best on this journey.
Source:
(1) “List of Centralized Crypto-Exchanges (CEX).” List of Centralized Crypto-Exchanges (CEX) >> Stelareum. Accessed 22 April 2022.
(2) “List of Decentralized Crypto-Exchanges (DEX).” List of Decentralized Crypto-Exchanges (DEX) >> Stelareum. Accessed 22 April 2022.
