I. What is a Centralized Exchange (CEX)?
A centralized Exchange (CEX) is a centralized exchange that is managed by a 3rd party - a company or an organization that manages the exchange. Users' crypto assets when transferred to an account on CEX are managed and controlled by that company or organization. It is an online platform and is considered the most popular way to trade cryptocurrencies. This includes buying and selling crypto-to-fiat as well as exchanging cryptocurrencies for other cryptocurrencies. They can be seen as an online marketplace for the entire cryptocurrency network.
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II. What is a Decentralized Exchange (DEX)?
Decentralized Exchange (DEX), also known as a decentralized exchange, all transactions on this exchange are automatically and directly between users (peer-to-peer network). These transactions are done automatically without depending on 3rd parties or intermediaries to keep your crypto assets. Besides, users have complete control over funds and transactions without depending on 3rd party intermediaries to avoid unnecessary risks in security, hacker, or fraud issues. In a decentralized exchange (DEX), it is difficult to control the source of funds or tax because all transactions are anonymous.
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III. Compare CEX and DEX
The most basic difference between a centralized exchange (CEX) and a decentralized exchange (DEX) is evident through the following 3 features:
1. Funds Control
Centralized exchange (CEX) users need to make an asset transfer to the exchange to facilitate cryptocurrency trading. Transferring funds to a CEX account will facilitate trading on a centralized exchange. These funds, after being transferred to the exchange, will be controlled by an intermediary trading service. This means that all information such as order books or custody is in the hands of a centralized exchange platform service.
In a decentralized cryptocurrency exchange (DEX), users trade directly with other users without the need for a central server. There is not a centralized platform service that owns the order book and custody in the middle. Therefore, the cryptocurrency is completely controlled by the users and the parties involved in the platform.
Some centralized exchanges (CEX) are used to allow users' accounts to trade anonymously on their intermediary platforms. However, new regulations by the governments of many countries have emerged in recent months resulting in the need for KYC and AML laws to be strictly adhered to. Therefore, it is difficult to trade anonymously on a centralized cryptocurrency exchange platform at the moment.
Meanwhile, a decentralized exchange (DEX) allows users to remain anonymous. The security system of the DEX is much more secure because it does not have a specific intermediary fulcrum for hackers to attack and infiltrate. Therefore, it is almost impossible for users' crypto assets to be attacked by hackers and the floor collapse is very unlikely.
The users of centralized exchanges (CEX) depend almost entirely on the intermediary platform to validate and authorize their transactions. The platform is a third party providing trusted crypto exchange services for users' peace of mind. Even without permission, centralized exchanges are still fully capable of manipulating or using users' assets. Therefore, you must know how to integrate and upgrade security features regularly, so you can safely avoid losses.
With a decentralized exchange (DEX), we do not need to depend on an intermediary. By a number of smart contracts and Blockchain (Protocol) implementations, the entire system is built to provide trustless authentication and authorization of cryptocurrency exchange transactions. With Blockchain technology, the decentralized exchange will not be able to manipulate assets or interfere in user transactions because of the transparent and fair system that this technology brings.
4. Confidentiality and safety
The DEX security system is more secure because there is no specific fulcrum for hackers to attack and steal assets. Therefore, being attacked by hackers is completely impossible and the exchange is very difficult to be knocked down.
The CEX system is a centralized system, although equipped with optimal solutions, it is still not immune to the attack speed of hackers. During this time, your property may be stolen. Exchanges (with the exception of some Japanese or Korean exchanges) have virtually no obligation to compensate participants for lost assets. Recalling the crash of the Coincheck exchange, the XEM coins in investors' accounts were completely lost but not compensated when the exchange owner did not have a compensation policy for users.
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