Is one better than the other? Learn the key points of each to make informed decisions.
Learn about the pros, cons and differences between buying, holding, and trading your cryptocurrencies on centralized vs decentralized exchanges.
Exchanges are marketplace platforms where users can buy, sell or interchange (swap) different assets. In crypto, there are two main categories of exchanges: Centralized Exchanges (abbreviated CEX’s) and Decentralized Exchanges (DEX’s).
While DEX’s are still not very common, and their daily volume is miniscule compared to CEX’s, they both have different advantages and disadvantages that you can consider when deciding where to trade your assets.
Binance being the biggest and most common example, these exchanges are online trading platforms that match users buying crypto with users selling crypto via orderbooks. They work essentially in the same way as online stock brokerage accounts do, which is one of the main reasons why they are popular among most people.
Other notable CEX’s include Coinbase, FTX, Bitfinex, Gemini, Kraken, and OKEx.
CEXs are the first gateway to crypto for retail investors and because they spend lots of their resources on marketing, they are used by a lot of active traders everyday.
This generates high trading volume compared to DEX’s. The higher the trading volume, the higher the liquidity. Liquidity references the ability to sell an asset for cash or other cryptocurrencies. Liquidity is important so as not to pay high fees when buying or selling an asset. If liquidity is high, we often say there is a low spread, meaning the difference between the bid (the offer of the users wanting to buy) and the ask (the offer of the users wanted to sell) is low.
Centralized exchanges generally support fiat to crypto on and off-ramps, which basically means you can use them to convert your USD, EUR or other fiat currencies into cryptocurrencies. This makes it easier for people to start their crypto journey and also gives them peace of mind that they can “cash out fast”, should the outlook turn grim.
The offers and functionality of CEXs extends far beyond simple crypto trading platforms. They also usually feature other services like margin trading, derivatives, staking, and more. They are currently the de-facto one-stop-shop for many retail investors.
CEXs dont require you to store and remember your private keys. You just need to remember a password, and in case you forget it, retrieving your account is still possible.
CEX’s process transactions in real-time, helping traders react without any delays whenever the markets change trends.
CEX’s mechanisms are trust-based: users agree to a centralized organization providing them with a service and safeguarding their funds in a similar way as they would do with a traditional bank. CEX’s store their user’s crypto assets and integrate wallets that they offer as part of their services (ie. they offer “custodial services”). This mechanism is beyond the user’s control, which effectively means that they hold all authority over your crypto and they could, under some circumstances, keep or surrender them (e.g. government policies could force them to do so).
They are also frequently targeted by cybercriminals. There have been several exchange hackings. The biggest ones having resulted in stolen funds of $534 million (in Coincheck) and $281 million (in Kucoin). Even household names such as Binance or Bitfinex have suffered multi-million hacks.
2. Off-chain transactions
It is important to note that CEX transactions, while fast, occur off-chain, meaning they are not registered in any blockchain. They are simply registered in internal ledgers owned by that centralized entity, in this case, said company servers become a single-point-of-failure.
3. Exposed to government regulation
As we mentioned before, Centralized Exchanges are under the rule of law of regulators and governments. To prevent money laundering, they must comply with KYC and AML regulations and collect extensive data about all of their customers. This is in direct contrast to the basic libertarian principles behind cryptocurrencies, as outlined in the Bitcoin whitepaper, written by Satoshi Nakamoto in 2008.
4. Censorship risks
Up a notch from #3: beyond government regulation and as we have seen with Canadian truck drivers opposing Covid-19 measures in March 2022 or with Venezuelan residents countless times, people could be tried to be pushed around or even censored for several different oppressing reasons via freezing of their funds and assets.
Decentralized exchanges (DEX) aim to do the same things that CEX’s do, only powered by smart contracts, instead of a corporate entities. They enable traders to swap and convert digital assets inside a blockchain and in many ways, they are the next step in the evolution of crypto.
The three most notable DEXs in terms of volume and popularity are PancakeSwap (in the Binance Smart Chain), Uniswap and Sushiswap (in the Ethereum blockchain).
It is worth noting that the most famous DEX’s do not use a model based on order books but on AMM’s, which stands for Automated Market Maker, and consists of pools of liquidity for the various supported assets. When users trade one asset for another, they are effectively adding an asset to a pool and subtracting another asset from it.
Decentralized exchanges are generally more secure than centralized exchanges for two reasons:
Non-custody of assets: Hackers target CEXs to access the central database where users’ private keys are stored. Since DEXs do not hold your private keys, hackers cannot steal them from a DEX.
No identity checks: Since DEX’s do not require KYC processes, there are no risks of private user data leaks.
DeFi and NFTs are the next two frontiers for crypto. DEX’s are very well positioned to capitalize on both. DEXs allows users to access the world of smart contracts and dApps that provide financial services, including money markets (i.e ending and savings products), and NFTs. In fact, many DEXs have embedded NFTs into their code, adding functionalities such as NFT avatar profiles and usage-based NFT airdrops.
Any project can mint their tokens easily on Ethereum or any other L1 blockchain and create a liquidity pool for it inside a DEX. This fact allows DEX’s to provide a much wider variety of assets than CEX’s do.
DEX’s are usually not working under government requirements or regulations. If deployed correctly, they also cannot be closed by any government or be forced to freeze any accounts.
DEXs are still a relatively new product and they do have fewer traders than CEX’s do. Lower volume also begets lower liquidity which can result in higher fees in some cases. It is worth to note though that the growth of DeFi has been impressive and we now - March 2022 - have some DEX’s churning $80 to $120 billion in volume per day!
The User Interface (UI) of many DEXs is still not very user-friendly. Features such as Limited Orders, Stop Losses or Margin Trades are still not available in many DEX’s.
Now that you understand the nuts and bolts of DEXs and CEXs, lets compare Maya to Uniswap (biggest DEX by volume) and Binance (biggest CEX by volume)
UniSwap is a DEX built on the Ethereum blockchain and it has been the #1 DEX in terms of volume since its creation on the DeFi summer in 2020.
UniSwap cannot facilitate cross-chain swaps though, you can only swap between tokens inside the Ethereum blockchain, like ETH, UNI, LINK, etc.
Trading assets non native to Ethereum (e.g. BTC, BNB, etc) would require users to get “bridged” or "wrapped" tokens, which are the result of another, more complex, process that comes with a whole new set of risks and caveats
In any way, wrapped tokens are non native tokens and in most cases require trusting a centralized authority, bringing us back to the Single Point of Failure problem. Wrapped tokens are also cumbersome -- they require manual effort to wrap/unwrap, and more effort to exchange for the true underlying asset.
In the end, it turns out, trading wrapped tokens inside DEX’s is not much different than trading in CEX’s!
Binance is a Centralized Exchange that gives it users a myriad of features but still keeps custody of all the assets inside. Because we believe in “Not your keys, not your crypto”, for us, the conversation would stop there. Not recommended.
Maya is a protocol which means that more than just a DEX, it is an entire blockchain. Different DEX’s and interfaces can be built on top of Maya, the first one being Obsidiex.
Maya is built using ThorChain tech, and it therefore offers the following ground-breaking features:
We will cover more about Maya Protocol and Obsidiex technology and features in our next article. Stay tuned!
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