Web3 and Web 2.0 are buzzing with talk of centralized and decentralized exchanges following the collapse of Sam Bankrupt-Fraud's FTX exchange and likely criminal wrongdoing. So this piece is more relevant than ever.
Let's define what we're talking about first. DEX is a decentralized exchange, while CEX is a centralized exchange, and the differences matter hugely.
It is also worth noting that the foundational ethos driving Web3 technologies and DeFi (decentralized finance) is decentralization, i.e., no one body or group should retain controlling power over the many, and it is the many, collectively, who should yield the power.
This philosophy directly results from financial institutions and technology businesses amassing too much control of our money, data, and privacy and generally acting like or being monopolies.
Therefore, decentralization is an antidote to corporate and financial tyranny and is likely why they are gaining popularity.
A DEX is a decentralized cryptocurrency exchange allowing users to buy, sell, store and exchange many digital currencies. Users can also use fiat (traditional currencies) to buy crypto or exchange their crypto for US dollars, for example.
DEXs operate on a peer-to-peer (P2P) basis and usually work using smart-contract technologies (like Ethereum) without the need for any centralized control or oversight.
Decentralized exchanges have the same capabilities as centralized exchanges but are usually faster and offer cheaper transactions as there is no fee-charging intermediary.
Crucially, DEX users never hand over the management of their funds and remain in complete control of their assets and private security keys. In other words, DEXs are non-custodial, and users can immediately access their funds at all times.
DEX users are not required to submit personal information, which is very important to libertarian types and those who value privacy. The only caveat to this is when you need to either buy crypto using fiat currency or if you are exchanging crypto for fiat. Usually, you will use a bank card or bank account details, so you are on the radar.
DEXs offer excellent security as every trade has to be cross-validated. However, it is ultimately the end-user who is responsible for their security, placing greater importance on personal responsibility, which is a crucial tenant of Web3.Because DEXs are decentralized, there is usually no centralized customer support - this is generally handled by the ecosystem's community in forum spaces and chat apps.
By contrast, a centralized crypto exchange (CEX) is a private business that provides a centralized, regulated marketplace to trade your crypto and use other account-based services to aid the funding and withdrawal of assets. Like other online trading platforms, they maintain an order book detailing buy and sell orders at the user level.
CEXs provide customers with four specific services: order matching, clearing, safe-keeping of your assets, i.e., custodian, and centralized customer service and support.
A CEX aggregates the orders placed in its order book and uses its underlying technologies to match and execute the specific buy or sell order.
Order book clearing means there are middlemen/intermediaries who also take a share in the action - making CEXs more expensive places to conduct crypto business.
CEXs act as custodians for your assets and private security keys. If there is a significant liquidity issue where many customers try to withdraw their assets, your access might be restricted. Conversely, if the CEX is hacked and compromised, your private security keys could be accessed and used to steal your assets.
As they are regulated, CEXs must know their customers by asking them to submit their personal details through a process known as KYC (know your customer) in exchange for access. For crypto users who value anonymity, this presents a problem.
Although CEXs are currently the most widely used type of crypto exchange, this is rapidly changing as DeFi users become savvier and grow weary of recent market events that impacted CEX users globally.
We are biased as we have a horse in this race, but if recent market events and the promise of absolute ownership don't sway your thinking, nothing will.
Remember: what happened to FTX's customers is a stark reminder and warning always to practice safe CEX ;)