DEX or CEX? I believe that some of you have heard about this when you dive into crypto. But how do DEX and CEX affect your crypto journey?

DEX and CEX are two different types of cryptocurrency exchanges. CEX (Centralized Exchange) refers to a cryptocurrency exchange that is operated by a central authority or company with examples of Binance, Huobi, and MEXC.

DEX (Decentralized Exchange) refers to a cryptocurrency exchange that operates on a decentralized blockchain network. Instead of being managed by a central authority or company, DEX is often managed by a Decentralized Autonomous Organization (DAO) when decisions are made through a consensus of stakeholders who hold voting power based on their ownership of cryptocurrency tokens on how the exchange operates. Examples of DEX include Uniswap, PancakeSwap, and SushiSwap.

Both types of exchanges come with a core value which acts as a platform for users to trade or swap their cryptocurrencies but having different degrees in terms of decentralization. Put it in layman’s words, by using DEX you’re directly interacting with a smart contract that is built on the blockchain network but you’re interacting with a website or a mobile application built by a central authority or company when using CEX service.

In terms of technology, DEX and CEX are fundamentally different. DEX operates on a decentralized blockchain network, meaning that they rely on smart contracts to execute trades and transactions. These smart contracts are self-executing and all transactions will be published on the blockchain once it is completed which is irreversible. Meanwhile, most of the CEX is operating on a traditional client-server model. CEX acts as an intermediary that facilitates trades and stores users’ data on its servers. The exchange will proceed with users’ deposit requests and withdrawal requests through the blockchain network but transactions that happen within the exchange will not be published on the blockchain.

In terms of funds ownership, users who use DEXs have complete ownership of their private keys and funds, which means that no one else has access to or control over their assets. The user’s funds are never held by the DEX; instead, the smart contract that executes trades on the DEX only permits the transfer of funds between the parties to the trade. Contrarily, CEX acts as a custodian of users’ funds, necessitating that users transfer their crypto to the blockchain wallet of the exchange before engaging in trading. In other words, while the fund is kept in the exchange’s blockchain wallet, the exchange is in charge of it. Although users can withdraw their money from the exchange, they are essentially entrusting the exchange with the safekeeping of their assets.

This fundamental difference in ownership of funds is one of the key factors that make DEX more secure than CEX. Because users have full control over their funds in a DEX, there is no central point of failure that can be targeted by hackers or other bad actors but there’s a risk of losing funds if you accidentally interact with a fraudulent smart contract or phishing link that could drain your blockchain wallet. In contrast, CEXs are holding users’ funds and are heavily targeted by hackers since they hold a large number of funds from their users.

In terms of privacy, nowadays most CEXs are required users to do the KYC process (Know Your Customer) before continue using their service where users have to upload documents to prove their identity. Users have to reveal their identities to use the exchange’s service which might cause leakage of personal data during hack attacks. Meanwhile, users may interact with DEX without revealing their identities as long as they are connecting to DEX with their blockchain wallet. Users may connect to DEX with a hot wallet or cold wallet depending on the platform availability.

Overall, the choice between DEX and CEX depends on personal preferences and trading needs. Factors like privacy, ownership of funds, and ease of use should be considered but there is no right or wrong which your preferences should be prioritized but come to DEX or CEX. But the best practice is to keep your trading fund in CEX but withdraw coins that you want to keep for the long term to a hardware wallet. Why? Because not your key, not your coin.

New to hardware wallets? Read here.