Trading cryptocurrencies is an essential part of the crypto experience, and exchanges are the digital marketplaces where all the action happens. You've probably heard of Binance, Coinbase, Kraken, Uniswap, and others - these are all exchanges. But did you know that not all exchanges operate the same way or offer the same possibilities?
🔍 Centralized vs. Decentralized
A centralized exchange (CEX) is similar to a bank. It's run by a company that oversees transactions, provides consumer protection, liquidity, and regulatory compliance in exchange for fees. When using a centralized exchange, you trust them to safeguard your coins, as they act as a custodian and hold the private keys to your account.
On the flip side, a decentralized exchange (DEX) is a peer-to-peer marketplace where transactions occur directly between users who want to trade crypto. Instead of using an intermediary organization, DEXs leverage smart contracts to automate and protect against potential scams, usually with lower fees than centralized alternatives. As a DEX user, you don't need to create an account owned by the exchange, and you remain the sole owner of your coins until the crypto exchange is executed by the smart contract.
💪 DEXs in Practice: Advantages
Complete control over your crypto: You don’t need to rely on a third party to access your funds. Centralized exchanges can suspend trading, freeze accounts, or even close.
Real custody: DEX transactions settle directly on the blockchain, while centralized exchange transactions are recorded on their internal database.
Access to diverse cryptocurrencies: DEXs offer a virtually limitless range of coins, from popular ones to the newest projects.
Lower transaction fees: DEXs eliminate intermediaries, reducing transaction fees to a minimum.
Privacy and anonymity: DEX users don’t need to provide personal data or complete a KYC procedure to trade or swap crypto.
🧗 DEXs in Practice: Drawbacks
Crypto-only: DEXs don’t allow exchanges between conventional currencies (like USD) and crypto – they exclusively trade cryptocurrency coins.
Complex user experiences: Decentralized exchanges can be challenging for those less familiar with blockchain technology.
Liquidity not guaranteed: For less popular coins, you might not find the exact crypto pair you want to exchange on a given DEX.
Volatile network (gas) fees: Users need to pay gas fees for transactions recorded on the blockchain. Gas prices depend on network traffic and can vary significantly.
Limited customer support: DEXs are not run by a company, so you might be on your own if there's an issue or mistake.
Decentralized exchanges (DEXs) align closely with the decentralized ideology of cryptocurrency and blockchain, eliminating intermediaries and opening new exchange options for users. However, DEXs can be intimidating for non-advanced users due to their complex interfaces and additional steps.
Thankfully, many applications, like Zelus wallet, have begun integrating DEX services, addressing some of the drawbacks.