CEX V. DEX: A GUIDE TO THE TWO TYPES OF BLOCKCHAIN EXCHANGE
There is a new wave of digital globally. From digital books to digital devices and cloud storage, we have also embraced digital assets and currencies. There is hardly anyone now who has never heard or stumbled across bitcoin, exchange, Binance and other prevalent cryptocurrency terms. In the Middle East, crypto-related exchanges, trading platforms and service providers are on the rise. In fact, 7% of crypto transactions today are attributed to the Middle East region. The region received about $271.7 billion worth of transactions in 2021. Similarly, the Middle East crypto market grew by 1500% in 2021.
On the one hand, cryptocurrency terms like Binance, dip, bitcoin etc., are easily relatable. On the other hand, many, especially non-crypto traders, probably have no idea what CEX (Centralized Exchange) or DEX (Decentralised Exchange) means. If you are interested in knowing about blockchain exchange and its types, this article is for you.
What are Blockchain exchanges?
These are services that help exchange cash into cryptocurrencies (like Ethereum) and vice versa. They could take the form of a website, mobile application or browser extension. There are two types of exchanges today. They are Centralized Exchange and Decentralized Exchange. These two exchanges work in different ways.
This is similar to traditional stock exchanges. Here, the exchange plays the role of a middle man between the buyer and seller. In crypto parlance, the word “centralized” means trusting a person to be in charge of one’s money. The problem with this type of exchange is that it is very vulnerable and can thus be hacked. Examples of CEX are Binance, Coinbase, Kucoin, Kraken and FTX.
Let us see how this type of exchange works.
- You give your money to the exchange, and they hold it for you just like a bank or middleman.
- You monitor the prices of cryptocurrencies that are available on the exchange.
- You can trade your fiat currency for cryptocurrencies. This, however, is dependent on the exchange.
- You place your order, and the exchange finds a seller to match what you want to buy, and if you are the one selling, the exchange finds a buyer for you. That is the final step to ensuring smooth crypto shopping on an exchange.
Decentralized Cryptocurrency exchange
DEX aims at staying true to the undiluted philosophy behind the cryptocurrency industry. Unlike CEX, DEX does not require a middleman to hold funds.
DEX is like a marketplace, as it allows both the buyer and the seller to come together to process transactions directly between one another. It allows for peer to peer trades. Unlike CEX, it is not easy to hack. However, they are not as popular as CEX. They also use liquidity pools or similar ideas to adjust the prices of assets. Examples are Sushiswap, 1inch, dYdx, Pancakeswap.
DEX is becoming more popular, especially in the middle east, because it offers more coins to trade. It does not need KYCs or user identification processes because it does not own users’ assets. Hence, they are less likely to crash.
While both types of blockchain exchanges allow users to buy and sell cryptocurrencies, there are some disparities concerning usability, liquidity and security. It is advisable for beginners looking to join the crypto space to trade with CEX. DEX is more suitable for experienced traders seeking privacy and complete control over their digital funds.