Centralised vs Decentralised Crypto Exchanges: Advantages & Disadvantages

Cryptocurrency exchanges are the main vehicles that power the trade between crypto assets. There are two primary types of them – centralised exchanges (CEXs) and decentralised exchanges (DEXs). The jury is still out regarding which one of these is more suitable for a typical crypto trader.

A CEX is a cryptocurrency trading platform provided as a service by a centralised entity, usually a for-profit company. Control of operations and custody of all funds used on the platform are in the hands of the company operating the CEX.

Traders opening accounts on a CEX have two main ways of providing initial funds:

1. They may purchase the initial crypto funds for the account using fiat currency. This is usually done using a credit or debit card or a bank transfer, depending on what payment methods the particular CEX supports.

2. They may transfer the initial funds from their on-chain cryptocurrency wallets held on a blockchain.

As soon as the account is funded, traders may begin swapping cryptocurrencies. The crypto funds in the account remain in the custody of the CEX at all times. Traders who have a blockchain-based, i.e., non-custodial, cryptocurrency wallet may transfer a part or the whole of the funds from their CEX account to the on-chain wallet whenever they prefer to assume custody of their own funds.

Unlike a CEX, a DEX is a blockchain-based crypto trading platform based on a decentralised protocol. Traders on a DEX use their on-chain wallets to carry out all the swap operations. This means that their funds remain in their custody at all times.

A wider choice of cryptocurrencies and swap pairs is one of the key advantages CEX platforms have over DEXs. Most of the cryptocurrency trading happens on CEXs, with only a small proportion, currently around 15%, going through DEX protocols.

The much higher share of trade volume allows CEXs to offer swap opportunities that most DEXs cannot match.

Faster transaction confirmation is another advantage of CEXs over DEX platforms. Swap transactions on most CEXs are confirmed within seconds. On many DEXs, depending on the blockchain used, transaction confirmation might take a few minutes, or, in extreme cases, even hours. This factor may not be critical for a casual, low-volume crypto trader but typically matters a lot for high-frequency traders who place a large number of orders every day.

Cheaper overall cost of trading for smaller amounts compared to Ethereum-based DEXs. Typical swap fees charged by CEXs and DEXs are under 1% of the transaction amount. The fees on DEXs work out to be even somewhat lower than the comparable fees on large CEXs.

However, every swap transaction on a DEX involves an additional fee, called the gas fee, payable to the underlying blockchain. The Ethereum blockchain, which is home to the majority of the leading DEX platforms, is particularly notorious for its high gas fees.

As of the time of writing, the estimated average gas fee for a swap transaction on the popular Ethereum DEX Uniswap stands at over $5 USD. While this fee may not matter much for large-amount transactions, it does eat into a trader’s margins when smaller swap amounts are involved.

No centralised entity controlling your funds is probably the main advantage of DEXs over CEXs. On a DEX platform, your funds always remain in your custody. For many users who prefer trading on DEXs, the fund’s custody issue is critical. The issue became particularly relevant after the high-profile collapse of the FTX exchange last November.

Access to some of the newest coins on the market. Many new crypto projects launch their coins on DEXs before getting a listing from an established CEX. Traders who primarily use DEX platforms may get early access to these coins, some of which might prove to be future stars.

This advantage of DEXs, however, is a double-edged sword since a non-trivial number of new coins are associated with scams or quickly become worthless. Thus, with the advantage of early access comes the risk of falling victim to a crypto scam or investing in a worthless asset.

The absence of Know Your Customer (KYC) requirements is another advantage of DEXs for some crypto traders. Most of the larger CEXs require identification documents from new users to open an account. Given the decentralised nature of DEXs, no such requirement exists on these platforms. For traders who value their privacy, this is an important argument in favour of using DEXs.

Depending on each trader’s needs, either CEX- or DEX-based crypto trading might be preferable. Users who value decentralisation, full control of their own funds, and privacy of operations may use DEXs, particularly for larger swaps, where Ethereum’s gas fees will not affect final amounts too much. For smaller, frequent transactions, using CEXs might be preferred due to the factor of gas fees.

Users who mainly want access to the widest choice of established coin pairs might prefer the CEX model.

However, the choice between the two exchange varieties does not have to be mutually exclusive. Nothing stops you from utilising both CEXs and DEXs and choosing one of these varieties depending on the requirements of each particular crypto operation.